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Author: Tan KW   |   Latest post: Sun, 22 Sep 2019, 7:00 PM


Fear on Bumi Armada is probably overdone - felicity

Author:   |    Publish date:

Friday, January 18, 2019 

Imagine this! A global company which does business on almost all parts of the world supplying to the large oil and gas companies, top 5 largest FPSO valued for less than RM1 billion or USD250 million that is.

As we see here from a diagram picked from BW Offshore, Armada is one of the largest players in this space

One can say that it  is now largely in debt (about RM11 billion) and huge portion of it is in short term debt hence its liquidity is an issue. With that we can probably put a discount because of the risks but those that fear over it defaulting in its debt probably is worrying too much.

Bumi Armada, as we know is controlled by one of the richest man in South East Asia, Ananda Krishnan and in himself, there is a certain level of ethics which he has shown and practiced towards the investment community in the past few decades from what we know.

We know that he has taken some companies private before and put them back again in the public. (All his major holdings Maxis, Astro, Bumi Armada have gone through that route) Through that route, which I was critical of them, he had actually not let many of his investors down as those holdings were profitably for most of the shareholders. This is unlike some of the companies that have gone private where the party who is privatising the shareholders have taken investors for a ride buying them way below intrinsic value.

This time around Bumi Armada has gone into a little bit of trouble largely due to the poor oil price since 2015.

Bumi Armada has two main core, the first which is OSV or Offshore Service Vehicle and the other FPSO which stands for Floating Production Service Offloading. Because of the poor oil price, OSV has largely been impacted and because the OSV's business has less barrier of entry, it is hugely competitive in times where activities on exploration, offshore production is kept low. Many companies in the OSV space are not able to be kept afloat.

FPSO on other hand is a more complex business. It is a partner to the oil companies which is extracting out the commodity from the sea. There are not that many companies which are capable of getting into this business. As mentioned above, Bumi Armada is one of the largest. Yinson from Malaysia is the other. Bumi Armada as we see it is less preferred than Yinson - mainly because of its balance sheet, not its capability. Yinson in fact, is a lesser size player. FPSO is not a dying business and it has much less competitors.
When as outside investors see that the company is in liquidity crunch, the two things that comes in mind is additional injection - which means more capital and the other being liquidation which is the worst of the two. Either one however, during times like this is less preferable. Bumi Armada has come out on record to say that it is not looking at raising funds through additional injection. Coming from them, I would say I trust what they are doing. Instead, it is looking at restructuring its short term debt - which is still a problem - and trying to renegotiate the rates. The CEO of Armada, in its letter to its employees, has written and advice to keep the level of new business development low as they are going to restructure the loans. From this perspective, I take it that it is trying to be careful rather than being in serious condition until it defaults.

Why do I say this? As a start, the level of business operations activities for Armada for the last 1 year is at its highest for the last 5 years. It has just gotten acceptances for 2 of its largest FPSO projects through Armada Kraken and Armada Olombendo. These are the 2 projects which are more complex than its earlier projects - and the key is that it has gotten acceptances, where from here the contractual work should be more smooth flowing. All in all, Armada has over RM20 billion of contracts in hand and another RM10 billion of extension options.

I would also like to highlight that the high gearing over the last few years is also because of mainly the 2 large projects. From 2014 to 2017 as shown below, it has been investing into these business.

What Armada has gotten into trouble is from the OSV business and the termination (Armada Claire) and bankruptcy of one of its client in Nigeria. These largely caused them to be sunk into some liquidity issue.

I do not think these are issues which cannot be solved especially given that it has solved the larger operational issue from Armada Kraken. Looking forward, I would like to think that despite oil price being lower than the best years between 2012 - 2014, many of the oil producing countries have gotten hold of the shock better than what they experienced in 2015. Oil price may not go as high as USD90 or USD100 anymore as it is now having shale as a competitor but they are better prepared.

In analysing Bumi Armada, it is not easy as it is going into chartering and there are different degree of complexities in its business. One of the better explained analysis is coming from CIMB here (page 52 to 57). Its analysis is extensive and I think it looks at it objectively especially on individual projects. Today, we hear that it is keeping its call unchanged. I feel it is right as to me fundamentally it has not changed much.

What the analyst as usual has not taken into account yet is the strength of the brand, relationship, customer exposure, processes that the company has built over the years. With that, it should be worth more.

I do not think the risk of defaulting is high. It may face high interest costs but it should also not be worth just around RM1 billion for a company this level.





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Labels: ARMADA

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  3 people like this.
supersaiyan3 Great analysis.
19/01/2019 12:47 AM
lwyy60 too high risk, provided Good q onward else who gonna save this sinking ship. Good luck all.
19/01/2019 1:01 AM
arv18 Since dear felicity is a fundamental analyst, it would be good if the technical term 'enterprise value' is used somewhere, and not just debt and market value.

It is highly misleading to just say "Look ... WOW! ... So Cheap!" without fully accounting for cash and debt.
19/01/2019 3:45 AM
Orlando So brave of CIMB to put a positive spin on d extension of d loan n for u to repeat n follow when Armada is not in a position to negotiate at all

Loan maybe restructured but it is not goin to be d same anymore

To exend banks wil probally set a term for part of d loan to b repaid now by selling off some OSV FPSO or other PPE n so thr is impairment risk here

Interest % wil very likely b higher as Armada is of higher risk now compared to whn d loan was first extended n FED has raised %

Even if extended n prolonged whr to get d cashflow as tat contract has bin terminated
19/01/2019 8:39 AM
value88 If there is no fear, how can we make money in stock market ?
We capitalise on fear and we do not join the party of greedy people.
19/01/2019 9:59 AM
probability aiyo...FPSOs need to install Scrubber to meet IMO 2020 requirement by this year...

huge CAPEX coming liao...

it will die thirst of cash flow for very very long ma...

19/01/2019 2:52 PM
probability by right...now only the fear should start...
19/01/2019 2:53 PM
Felicity If one looks at the report by CIMB below, it is quite extensive. It is using Sum of Parts valuation some level of discount. To me, it is sufficient, for how it values the company, look at page 55.


Again, I am putting a higher perspective on valuation as Sum of Parts does not look at the intangibles which to me Bumi Armada is quite strong.
Again, I feel that as in past experiences, investors are very risk averse over companies with debt. Previously, there was a similar fear over Airasia. Look at where Airasia is today in its balance sheet. Today, Bumi Armada's case is slightly more severe than Airasia, but it has many options where it can solve its short term gearing and liquidity issue.
19/01/2019 2:54 PM
stockraider If that is the case better take profit & come join sapnrg as it has raised rm 8 billion funds, it is coming up end next wk, with the emergence of choysun yeh loh...!!

Posted by probability > Jan 19, 2019 02:52 PM | Report Abuse

aiyo...FPSOs need to install Scrubber to meet IMO 2020 requirement by this year...

huge CAPEX coming liao...

it will die thirst of cash flow for very very long ma...


9204 posts
Posted by probability > Jan 19, 2019 02:53 PM | Report Abuse

by right...now only the fear should start...
19/01/2019 2:55 PM
Felicity I personally do not like Sapura because to me the sincerity is not there, his salary (RM70 million a year) and the support that they get from some of the local funds. I tend to shy away from companies like this.

That's my personal opinion.
19/01/2019 3:03 PM
stockraider yes i heard pnb have talk with that fellow to bring it line with performance mah...!!

If not they/pnb would not want to be taiko to bank roll loh...!!

Posted by Felicity > Jan 19, 2019 03:03 PM | Report Abuse

I personally do not like Sapura because to me the sincerity is not there, his salary (RM70 million a year) and the support that they get from some of the local funds. I tend to shy away from companies like this.

That's my personal opinion.
19/01/2019 3:06 PM
Sniper86 here comes the naysayers....if u think it is high risk, then step away from it...
19/01/2019 3:35 PM
Orlando To justify d CEO crazy 70m fee one wonder if he has sacrificed Saprng's interest by lowing d profit margins of all d contracts won to win those contracts

Short term looks impressive wit winning lots of contracts but later all shareholders suffer with low or no profits
19/01/2019 9:08 PM
probability 8 FPSO + 44 OSVs = 52 units need Scrubber for IMO 2020 compliance

Cost = 3M USD per scrubber minimum including installation & commissioning
= 52 x 3M
= 156 Million USD

= 650 Million RM CAPEX

Another alternative to LSFO is to install an exhaust gas cleaning system (EGCS) commonly referred to as a “scrubber” system. These are not cheap with prices being quoted of US$2-5 million but they allow the ship to continue to consume HSFO. With some analysts predicting a $400 per tonne premium for compliant fuels the payback time for some ships is less than 12 months.
19/01/2019 10:18 PM
probability The above is a serious gaping hole on cash flow either via Capex before 2020 or via rise in Operating costs by the same amount per year from 2020 onwards if Armada had opted to use expensive MGO instead of installing Scrubber for HSFO usage on their vessel engines.


Till the above can be disputed / clarified by someone, Armada is certainly a no no for me...

good luck
19/01/2019 10:22 PM
LMKCPH Are you sure that all Armada FPSO and OSV marine diesel engines operated with Heavy Fuel oil and not MGO?

ion plants plants operated
19/01/2019 10:41 PM
probability yes, i am pretty sure all vessels in sea of old design is catered for HSFO....

the price is way cheaper than MGO (refer above 400USD/tonne)...

its difficult to use MGO in ship engines as their viscosity is low...and also solidifies easily at cold climates...

its extremely dangerous to use MGO on engines as they risk of dripping inside the combustion chamber even when it is not burning...risking explosion when engine is started
19/01/2019 11:01 PM
LMKCPH Please show your marine engineer's license - class 1 certificate of competency, then you can talk about marine internal combustion engines development. ha, ha, talk with facts please.
20/01/2019 12:12 AM
probability you prove to me that these ships are using MGO lor...
20/01/2019 12:14 AM
LMKCPH pls do not copy and paste all these IMO Rules and think that all rules are applicable to all vessels with checking others detail. There are many exe.ptions can be granted by Flag Administration of the marinetimd nation. Talk with facts , please
20/01/2019 12:20 AM
probability u sound very stupid leh...the whole argument is because HSFO is way cheaper than MGO and thats why ships use these on their engines..

the whole objective of using a scrubber is to continue doing so (using HSFO)..

what the vessel owner loses in Capex is expected to be recovered by the savings in using HSFO...

if they are already using MGO...then they will be incurring high operating cost equivalent to the expected Capex every single year
20/01/2019 12:20 AM
probability IMO’s 2020 sulphur deadline a done deal

It is now impossible for the IMO to push the 2020 global 0.5% sulphur limit to a later date without breaking its own rules. From January 2020 it will be illegal to run a ship using fuel containing more than 0.5% sulphur without operating an exhaust cleaning gas system.

20/01/2019 12:23 AM
LMKCPH please do not bullshit without facts here, if you are a ship operator, you will not talk like kaki lima man
20/01/2019 12:24 AM
probability if you want to talk with facts, show me the news letter, the prove.

shall i believe you or the whole IMO organization?

You expect me to belive your bullshit with 5 post id...fxxk off.
20/01/2019 12:26 AM
probability Containership scrapping set to spike as IMO 2020 looms



Most analysts predict that the difference between HFO and LSFO will be in the region of $200 per ton.

Assuming that scenario to be the case in January 2020, shipowners could in theory recoup the cost of their investment in scrubbers within a few years, depending on the size of ship and its trading pattern.

But these same scrubber economics will not apply to elderly ships with asset values that are not significantly in excess of the cost of installing the onboard refining systems, which could be up to $10m a unit.

It is therefore expected that non-operating owners of older tonnage will renew their interest in scrapping as the year progresses, thus providing a boost to the demolition market.

And scrapping will also be on the agendas of ocean carriers as they brace themselves for IMO 2020.
21/01/2019 12:20 AM
Jason Toshi Ho Very interesting information probability, I had not anticipated such a requirement in my investing in yinson.

May I humbly ask if it is possible to redirect me to more information on this scrubber thing?

I would like to read further, it is very interesting requirement and would be very damaging to short term earnings of FPSO.
22/01/2019 11:14 PM
qqq3 1015....don't worry la....FPSO is not a ship.....your Yinson safe la.
22/01/2019 11:27 PM
qqq3 YINSON is ring fenced....they never built any thing without very tight long term agreements with good clients.....they don't have counter party risks.
22/01/2019 11:28 PM
amet2017 FPSO diesel generator engine (generating electricity) is using MGO/MDO. HFO is used for main engine to propel the FPSO (in the case of self propelled FPSO).

22/01/2019 11:32 PM
qqq3 so many experts...I better keep quiet....

I still think u worry too much....
22/01/2019 11:41 PM
qqq3 u think Yinson shareholders idiots meh?
22/01/2019 11:42 PM
qqq3 the whole shipping industry and FPSO industry collapse meh ? That is not how the world works.
22/01/2019 11:46 PM


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