Investment Highlights

• We maintain our HOLD recommendation on Bumi Armada with an unchanged fair value of RM0.20/share, based on a 30% discount to our sum-of-parts of RM0.33/share given the possibility of a highly dilutive equity-raising exercise against a backdrop of a heavily geared balance sheet.

• As we have guided earlier, the group has successfully refinanced a US$380mil (RM1.6bil) unsecured term loan and US$280mil (RM1.2bil) revolving credit facilities into 2 tranches of US$660mil (RM2.7bil) loan facility. The tranche 1 portion of US$260mil will be repayable over 2 years while the tranche 2 of US$400mil over 5 years.

• Recall that the group has only paid US$120mil of the US$500mil debt due in October 2018 for the Kraken floating production storage and offloading (FPSO) vessel, while the remaining US$380mil was being renegotiated until now.

• While the settlement of this short-term commitment is positive notwithstanding an estimated interest rate which is higher by 1.5ppts (RM40mil annually – 12% of FY20F earnings), we highlight that the refinanced portion accounts for only 26% of the group’s RM10bil total debt. The group still has to renegotiate with its lenders for RM3.1bil sukuk and unsecured term loans as Bumi has breached their net debt/EBITDA convenant terms.

• The likelihood of a dilution from an equity-raising exercise remains elevated notwithstanding this debt restructuring exercise given Bumi’s higher FY19F net debt/EBITDA of 9.1x vs. Yinson’s 2.9x.

• Hence, the group intends to dispose of idle assets and minority stakes in operating FPSOs such as the US$1.5bil Olombendo FPSO which is fully operational currently.

• We estimate that a 40% stake sale in the Olombendo FPSO could secure US$275mil (RM1.1bil) cash assuming a project IRR of 11%. However, it will only cut Bumi’s net debt/EBITDA to 7.9x, which remains elevated against its peers.

• Management has not been able to tap into the group’s US$1.5bil Euro medium-term note programme given the same financial institutions under the current term loan, as its maturity deferment was still being negotiated.

• Meanwhile, the potential confirmation of an ONGC FPSO charter for Bumi’s JV with Shapoorji Pallonji Oil & Gas for the KG-DWN 98/2 deep-water project off India may not involve any significant equity capital as the group could transfer an existing idle FPSO such as Armada Claire into the JV structure while its partner contributes modification costs.

• Assuming a capex of US$300mil, a 50% equity stake, project IRR of 12% and WACC of 7%, we estimate that this charter could raise Bumi Armada’s SOP by 7% and FY21F earnings by 8%. Nevertheless, the stock trades at a depressed FY19F PE of 5x against a backdrop of still elevated balance sheet risks.

Source: AmInvest Research - 24 Apr 2019