Investment Highlights

• We maintain our HOLD recommendation on Bumi Armada with unchanged forecasts and 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 indicated in our earlier reports, the group’s 30:70 joint venture with India’s Shapoorji Pallonji Oil & Gas (Shapoorji) has secured a time charter for a floating production, storage and offloading (FPSO) vessel charter from Oil and Natural Gas Corporation Limited (ONGC) for the ONGC NELP Block KG-DWN 98/2 Development Project Cluster-II field located on the east coast of Kakinada, offshore India.

• However, the JV will be converting a tanker which has been identified by Shapoorji and not involve Bumi Armada’s idle FPSOs or vessels.

• The contract value is US$2.1bil (RM8.8bil) for a fixed 9 years with options for 7 annual renewals which carry an aggregate US$655 million (RM2.7bil).

• Assuming a capex of US$1.3bil (slightly lower than for Armada Olombendo), project IRR of 11% and WACC of 7%, we estimate that a 30% stake could substantively raise the group’s SOP by 17% and FY21F net profit by 9%.

• Notwithstanding management’s earlier claim that financing will not be needed for this project, we estimate that a debt-toequity financing ratio of 80:20 will mean that the group will need to raise additional equity financing of RM322mil, which may be uncertain given that Bumi Armada has just recently refinanced US$660mil (RM2.8bil) of unsecured term loan and revolving credit facilities.

• Additionally, 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 given Bumi’s high 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.

• Hence, the stock trades at a depressed FY19F PE of 5x against a backdrop of still elevated balance sheet risks.

Source: AmInvest Research - 7 May 2019