Parental loan support to UMWOG a temporary but positive development
KUCHING: UMW Holdings Bhd’s (UMW) inter-company loan for UMW Oil & Gas Corporation Bhd’s (UMWOG) working capital requirements has been viewed positively by analysts.
However, the loan has also been observed as a temporary ‘band-aid’ to UMWOG’s on-going challenges which includes its existing debts, unutilised assets and more.
In a report, the research arm of AmInvestment Bank Bhd (AmInvestment Bank) said UMW, which owns 55.7 per cent of UMWOG, has extended an RM308 million inter- company loan for UMWOG’s working capital requirements.
It noted that the loan interest rate is set at six-month Kuala Lumpur Interbank Offered Rate (KLIBOR) and 1.75 per cent per annum and with a repayment period of five years.
“This is a positive development which highlight’s UMW’s parental support for UMWOG, which has to resolve its RM2.1 billion debt due for repayment soon.
“However, this is only a temporary band-aid as the interco loan represents only 15 per cent of the refinancing requirements,” it said.
It explained that UMWOG’s first quarter of the financial year 2016 (1QFY16) negative earnings before interest, tax, depreciation, and amortisation (EBITDA) of RM5 million indicates that the coming months may be worse given that the majority of its assets are currently not being utilised or secured by a long term charter.
“As such, we expect negotiations with financial institutions for UMWOG’s existing debt to include some form of corporate guarantee from its parent, which requires shareholder approval.
“We also do not discount the possibility of a dilutive debt restructuring exercise, which may involve an equity raising scheme,” AmInvestment Bank opined.
Meanwhile, on UMWOG’s outlook, the research house noted that the company derives most of its revenue from drilling rigs.
As such, its prospects remain challenging in the near-to medium term as slowdown in the sector maintains downward pressure on day rates, which are exacerbated by an influx of uncontracted newbuilds.
“Currently, only two of the group’s eight rigs are in operation: the semisubmersible Naga 1 and jack up Naga 7.
“However, Naga 7’s charter will expire next month, which will mean that only one rig will be in operation from July to October this year, when Naga 8 jack up rig will recommence operations together with Naga 6, which has just secured the Petronas Carigali contract,” it added.
Hence, it said, the stock currently trades at a 32 per cent discount to its latest book value of RM1.39 per share, which could be eroded by further losses.
The research house pegged a ‘hold’ call on the stock.