Investment Highlights

• We maintain SELL on Bumi Armada with an unchanged fair value of RM0.10/share, based on a 30% discount to its 5-year PBV of 0.26x, which implies an FY21F PE of 10x.

• Bumi Armada’s 49%-owned floating production, storage and offloading vessel (FPSO) Armada Sterling, which Shapoorji Pallonji Oil and Gas Pvt Ltd holds the remaining stake, will secure an extension to its 7-year original time charter expiring on 19 April 2020.

• The joint venture has received notification of India’s Oil and Natural Gas Corporation’s (ONGC) intention to extend the charter hire of the FPSO from 20 April 2020.

• While approval for the formalisation of the contract extension has been delayed due to the Covid-19 lockdown in India, ONGC has requested the joint venture to apply for permit extension from the relevant authorities to ensure continuity of operations at the site.

• Recall that the US$400mil FPSO started operations in 2013 in the ONGC D1 field, off Mumbai, India under a 7-year firm time charter that has 6 annual extension options. The charter, signed in 2011, has a fixed value of US$620mil.

• Given that the debt on the vessel would have been mostly settled by now, we expect a lower charter rate for this first annual extension. Assuming a 30% pretax margin and halving of the charter rate, we have raised the group’s FY20F earnings by 5%. We have also raised FY21F–FY22F earnings by 8% on the assumption that the charter will be extended again over the next 2 years.

• Besides Armada Sterling, Bumi Armada also has 49% equity stakes in Armada Sterling II stationed at C-7 field, off India and FPSO Karapan Armada Sterling III at the Madura field, off Indonesia. The group has also recently secured a 30% stake in the US$1.3bil FPSO to be deployed at ONGC’s KG-DWN 98/2 deepwater field, off India, in which financial close for the contract has yet to be reached.

• While Enquest’s Kraken field is currently enjoying production efficiency of over 90%, current Brent prices are trading below its revised FY20F cash flow breakeven oil price of US$33/barrel. Despite its halving of capex guidance to US$120mil involving other unrelated fields, we do not discount the possibility that Enquest, which has a high net debt/EBITDA of 1.4x, could defer lease payments to Bumi Armada if the current environment is prolonged.

• Hence, default risks remain elevated for the group given its high FY20F net gearing of 2.7x currently. The stock now trades at a low FY20F PE of 10x given rising risks of charter terminations, project deferrals and delayed lease payments amid a weak balance sheet.

Source: AmInvest Research - 16 Apr 2020