All eyes on UMW’s O&G impairments next week
although the group would be incurring impairments, the long-term effect of the exercise would be a strengthened balance sheet, reduced exposure to debt, more efficient operations and a stronger company, delivering better value to shareholders.
Based on its 2015 annual report, apart from UMW-OG, the group’s other O&G assets are under UMW Corp Sdn Bhd, UMW Oil & Gas Bhd, UMW Petropipe (L) Ltd and UMW Australia Ventures (L) Ltd.
In the latest financial period ended Sept 30, 2016, the group incurred RM149.2mil in net losses from its listed O&G segment and RM99.2mil for its unlisted segment, totalling RM248.4mil in net losses from the segment.
Despite recording RM7.9bil in revenue for the cumulative period, it posted RM124.4mil in net losses.
MIDF Research, which recently upgraded the stock to “buy” from “trading buy,” says its target price of RM6 conservatively assumes a RM550mil impairment in FY16F, which is 1.5x the RM366mil impairment seen in FY15 for the group’s O&G assets.
“It is difficult to give an accurate estimate as the carrying value in these O&G assets are not disclosed by management.
“A smaller than expected impairment could trigger a further increase in our target price.
“With the upcoming earnings improvement from the demerger, potentially improved auto market share and already very low expectations priced into the stock, we think share price could see a positive re-rating in the nearterm,” it says.
It notes that UMW Holdings’ impairments on its non-listed O&G assets could see some spill over in FY17F, but this should not be too significant.
“More importantly, post impairment of the non-listed O&G assets, UMW Holdings should see narrowing losses from these units, given effectively lower depreciation,” it says.
The research house says the non-listed O&G units registered annual net losses of between RM100mil and RM150mil.
Based on the nine-month 2016 numbers, UMW-OG contributed to net losses of RM149mil at UMW Holdings (based on its 56% stake), pushing down group earnings to a net loss of RM124mil.
“Excluding UMW-OG losses, earnings would have easily registered a profit of RM24mil in the period,” it says.
It notes that this figure includes net losses from the non-listed O&G units, amounting to an additional RM99mil.
“Assuming all the O&G units are disposed of, group bottomline would have actually seen a net profit of RM124mil for the nine month-period,” it notes.
It added that the demerger of the O&G units will deleverage the group’s balance sheet, drive earnings turnaround and allow better focus on its core divisions.
“Notwithstanding the upcoming large impairment for UMW Holdings’s non-listed O&G unit, issues revolving this division are largely behind, with the disposal of its main oil and gas asset in Q2’17,” it says.
According to CIMB Research analyst Mohd Shanaz Noor Azam, there will be limited upside to UMW Holdings’ share price given that the stock has gone up about 18% since January 2017.
He sees downside risks for the stock from the pending impairments, noting that the fourth quarter will be a kitchen-sinking quarter.
The research house recently downgraded the stock to “hold” with a higher RM5.50 target price.
Following a meeting with the management, he says the group plans to complete the UMWOG divestment in Q2’17, and expects to exit the remaining non-listed oil and gas assets by end-2017.
“Nevertheless, management indicated the group will incur a major impairment for its O&G division in the upcoming results,” he says.
He adds that the exercise will improve UMW Holdings’s balance sheet position given that it will no longer need to carry UMW-OG’s debt of about RM3.5bil.
Based on previous announcements to the stock exchange, the exit of UMW Holdings from its listed O&G asset will be completed via a series of corporate exercises, which includes a dividend in specie and a capital injection estimated at RM750mil by its major shareholder Permodalan Nasional Bhd (PNB) into a new enlarged O&G outfit that will have Ekuiti Nasional Bhd (Ekuinas) as a shareholder.
Under the exercise, UMW Holdings will distribute its 55.7% stake in UMW-OG to shareholders, following which UMW-OG will take over Ekuinas’ 42.3% stake in Icon Offshore Bhd, triggering a mandatory general offer.
UMW-OG will offer Icon shareholders an option of cash of 50 sen each share or one UMW-OG share valued at 80 sen.
The O&G unit will also acquire Orkim Sdn Bhd, a company that owns and operates clean petroleum products, for RM472.73mil cash from Ekuinas. The enlarged UMW-OG will be undertaking a rights issue amounting to RM1.8bil, of which part of the proceeds would go towards the purchase of Orkim.