UMW’s O&G units demerger a huge positive development
KUCHING: UMW Holdings Bhd’s (UMW) demerger of oil and gas (O&G) units have been viewed by the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) as a huge positive development.
According to MIDF Research, the demerger of UMW Oil & Gas Corporation Bhd (UMWOG) should improve UMW’s financial position substantially as it removes up to RM4 billion debt off UMW’s books, or 75 per cent of total group debt currently.
“More importantly it frees up borrowing capacity as gearing is reduced to 0.4-fold from 0.9-fold, allowing better allocation of resources to the existing core businesses which are autos, equipment and mechanical and engineering (M&E),” the research arm said.
MIDF Research highlighted that in the upcoming fourth quarter of 2016 (4Q16), UMW will take one big impairment on its non-listed O&G assets which are slated for sale. The research arm opined that while there could be some small spill over in financial year 2017 forecast (FY17F), this should not be too significant, if any.
“More importantly, post impairment of the non-listed O&G assets, UMW should see narrowing losses from these units given effectively lower depreciation,” it said.
The non-listed O&G units registered annual net loss of between RM100 million to RM150 million and MIDF Research expected this to reduce substantially this year. MIDF Research noted that the nonlisted O&G assets comprise mainly pipe manufacturing units, besides land rigs and pipe trading.
“On a positive note, the pipe manufacturing unit recently managed to secure new contracts which might enable it to turn profitable this year,” the research arm said.
MIDF Research pointed out that it is important to also note that UMW can easily swing into profits with the exclusion of UMWOG losses. The research arm noted that as an illustration, based on the first nine months of 2016 (9M16) numbers, UMWOG contributed to net losses of RM149 million at UMW (based on its 56 per cent stake), taking down group earnings to a net loss of RM124 million.
“Excluding UMWOG losses, earnings would have easily registered a profit of RM24 million in the period,” MIDF Research said.