UMW O&G - Too high to fall

Its share price has done exceedingly well lately, surging by 21% in the month of Dec 2013. The strong performance may be attributable to the two contracts wins and stronger investor appetite for Malaysian oil and gas stocks.

At rm4.12, it is valued at 34.1 times of FY2014 earnings per share and 23.8 times CY2015 EPS, making it the most expensive rig operator as well as the most expensive Malaysia O&G stock.

The group is trading at a substantial premium to the global peer average CY2014 and CY2015 PER of 11 times and 8 times and Malaysian big caps O&G companies’ average CY2014 and CY2015 PER of 20 times and 16 times respectively.

While the group’s management and the good prospects of Malaysia’s jack up rigs market, its valuation is stretched with limited upside potential. The risk is on the downside.
Key risks to the negative view are the undertaking of major earnings accretive mergers and acquisitions, faster than expected expansion plan and stronger than expected earnings.