Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with unchanged forecasts and 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.

• We are positive on Upstream’s report that Bumi could have found a charter replacement for its currently idle floating production, storage and offloading (FPSO) vessel Armada Claire.

• The group is likely to secure the charter from Australian independent Karoon Gas's Neon and Goia (formerly Echidna and Kangaroo) field developments in Brazil's Santos basin, after other prospective bidders Modec International, SBM Offshore, BW Offshore and Bluewater pulled out due to price concerns, which left Bumi as the sole preferred bidder.

• While Bumi has offered a price tag near to Karoon’s budget, there are some issues needed to be ironed out as the award of the contract is expected over the next few months. Bumi is jointly bidding with Schlumberger and Subsea 7, which will handle the project’s subsea infrastructure.

• There are concerns over the financing capability of Karoon, which is looking for partners to share the risk and cost of the Neon development. Karoon plans to farm out a portion of its interest before proceeding with the Neon development.

• Karoon requires an FPSO with a capacity of 40,000 barrels per day that will not require much conversion to handle Neon’s light 39-degree API oil, while operations at Goia is scheduled to start at a later date. Karoon is offering a 5-year firm charter agreement, with 2 options for three years each. Once the contract is awarded, Bumi will retrofit its floater Armada Claire to the Brazilian standard.

• Recall that in March 2016, Woodside Petroleum had unexpectedly issued a notice of termination in March 2016 to Bumi for the Armada Claire working on the Balnaves oilfield off Western Australia. The Armada Claire, with production capacity of 30,000 barrels per day and storage capacity of 1 million barrels, is currently moored in Batam, Indonesia.

• Management has not provided an exact book value for Armada Claire as Bumi is seeking legal claims against Woodside’s contract termination. Assuming the remaining book value of Armada Claire at US$100mil, the project IRR of 12% and WAC of 6%, we estimate that this charter could raise FY20F earnings by 7% but a much smaller 2% accretion to our SOP.

• 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. Currently, the stock trades at a compelling FY19F PE of 6x against a backdrop of improving balance sheet risks.

Source: AmInvest Research - 26 Oct 2018