CIMB negative on UMW-OG proposals

KUALA LUMPUR: CIMB Equities Research is “negative” on UMW Oil and Gas’s (UMW-OG) plan to buy an offshore service vessel (OSV) player and a product tanker operator as well as issue rights to recapitalise and to fund the purchases.

“We are negative on these proposals as the acquirees are priced much higher than UMWOG and the rights issue is unnecessarily large and dilutive.

“We downgrade our DCF-based target price to factor in the dilution,” it said in a report issued last Friday.

To recap, by July, UMW-OG targets to complete two acquisitions – the purchase of a 42.3% stake in Icon Offshore Bhd (not rated) from Ekuinas, followed by a mandatory general offer for the rest of the shares, and the purchase of 95.5% interest in Orkim Sdn Bhd, also from Ekuinas, followed by the acquisition of the remaining 4.5%.

By August, UMW-OG hopes to complete the issue of rights shares to raise RM1.8bil.

“Yawning valuation gap does not favour UMW-OG shareholders. These proposals have taken us by surprise because UMW-OG has been suffering deep losses and is not in a position to acquire.

“The unfavourable valuation gap is also surprising. UMW-OG plans to buy Ekuinas’s 42.3% stake in Icon at a price-to-book value (P/BV) of 0.82 times in exchange for new UMW-OG shares valued at only 0.59 times.

“The subsequent mandatory general offer (MGO) will offer Icon shareholders a choice of new UMW-OG shares at the same low valuation or a cash payment.

“UMW-OG also plans to buy Orkim at P/BV of 3.56 times in an all-cash deal,” it said.

“Icon is an OSV player with 37 units and has been reporting small core profits or losses since first quarter 2015.

“However, up to third quarter 2016, its utilisation rates are still falling on-year and South-East Asian charter rates are still declining.

While improvement is possible, the pace of charter rate recovery will be constrained by global OSV utilisation of just 40%.

“We struggle to justify UMW-OG’s willingness to pay for Icon’s OSV assets.

“Orkim in a better position but high valuation leaves little upside. Orkim, on the other hand, is earning PBT margins of 20-30%, with a 30% market share of the clean product tankers plying the protected cabotage trade in Malaysia. It has a fleet of 14 product tankers and two LPG carriers, locked into firm contracts until 2021 with options to extend until 2024.

“The valuation attached to Orkim, however, implies very blue-skies utilisation and rate assumptions, leaving little upside for UMWOG.

“Finally, UMW-OG will be issuing RM1.8bil worth of rights at a price of 50 sen a share, of which RM1.07bil will be used to fund the acquisitions and RM750mil to reduce UMWOG’s debt.

“The size of the dilutive rights issue would not have been so large if not for the proposed acquisitions,” said CIMB Equities Research.