Investment Highlights

• We upgrade our recommendation on Bumi Armada to BUY from HOLD with a higher fair value of RM0.90/share (from an earlier RM0.60/share), based on a lower discount of 25% to our sum-ofparts of RM1.20/share, which implies an FY19F PE of 13x.

• The final acceptance of the floating production storage and offloading Armada Kraken (FPSO) vessel has significantly alleviated liquidity concerns on the group, as options are now available for the group to refinance short-term debt of RM3bil as at 30 June 2018.

• The final acceptance was completed in accordance with the recent amendment to Kraken’s bareboat charter, dated back in December 2013.

• The group is planning on refinancing its debt or tapping US$1.5bil Euro medium-term note issuance. Out of the total short-term debt RM6.2bil, RM1.9bil for the Kraken vessel will be reclassified to long-term debt.

• Alternatively, there are plans for partial divestments of its wholly-owned FPSO Olombendo, which has recently achieved full acceptance, but will reduce its earnings contribution to the group. Management reiterates that a cash call is not being considered at this stage.

• Recall that the group had made 2QFY18 impairments of RM477mil due to Armada Kraken’s penalties arising from different technical specifications determined in the contract amendment to mitigate Bumi Armada’s exposure to the client EnQuest’s claims.

• While the group has already paid US$15mil to waive the client EnQuest’s claims, an additional US$10mil will be paid to close out the project expenses.

• Under the current interim agreement, EnQuest has been paying only 70%-80% of the original charter. With the final acceptance, the charter payment will be restored to the earlier contract value.

• Additionally, the charter will now revert to a finance lease from an operating lease currently, and depreciation charges for the vessel will no longer be accounted. All-in, this has raised our FY18F-FY20F earnings by 8%-12%.

• The group’s order book of RM32bil, of which 63% comprise firm charters, accounts for a comfortable 12.8x FY18F revenue. The group remains on the prowl for new FPSO charters in West Africa and Brazil.

• Upstream had earlier tipped Bumi Armada to secure the charter for a huge FPSO for Eni's Zabazaba project off Nigeria in in the OPL 245 field. Assuming that the capex for the FPSO is similar to Olombendo's US$1.5bil in Angola with a project IRR of 11%, we estimate that Bumi Armada's SOP could be raised by 11 sen.

• Currently, the stock trades at a compelling FY19F PE of 8x against a backdrop of improving balance sheet risks.

Source: AmInvest Research - 12 Sept 2018