Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with an unchanged fair value of RM0.90/share, based on a discount of 25% to our sum-of-parts of RM1.20/share, which implies an FY19F PE of 13x.

• Our forecasts are unchanged for now even though the US$8.5mil (RM35mil) proceeds of the crude oil from the floating production, storage and offloading (FPSO) vessel Armada Perdana accounts for 12% of Bumi Armada’s FY18F earnings.

• While we expect a positive boost to immediate earnings given that the group has already made substantive provisions on Armada Perdana’s receivables, the impact may be partly mitigated by the vessel’s costs associated with man power and support operations as well as legal costs.

• Management has not guided on the outstanding book value nor receivables due from its client, Erin Petroleum, which has filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in April 2018, and subsequent conversion to a liquidation proceeding under Chapter 7 of the Bankruptcy Code in July 2018.

• Bumi Armada has announced that the United States Bankruptcy Court for the Southern District of Texas granted an order for the consensual appointment of a receiver/manager in Nigeria over Erin Petroleum Nigeria Limited to oversee the sale and disposal of the crude oil stored on Armada Perdana, which has ceased all production activities since Erin went under liquidation.

• The order provides that the US$8.5mil portion of the crude oil sale proceeds be applied towards partial settlement of the outstanding amounts due from Erin to Bumi Armada and Armada Oyo Limited under the operational and maintenance services contract and bareboat charter contract.

• The group’s current 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 6x against a backdrop of improving balance sheet risks.

Source: AmInvest Research - 23 Oct 2018