Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with a higher fair value of RM0.51/share (from an earlier RM0.47/share). This is based on a discount of 30% to the group’s higher sum-of-parts (SOP) of RM0.73/share from RM0.67/share previously as there could be additional impairments due to idle vessels, especially for the 2 offshore construction units in the Caspian Sea.
• The 6 sen increase in our SOP stems from the group’s 49%- owned floating production, storage & offloading (FPSO) vessel named Armada Sterling securing a fresh 10-year firm charter for bareboat operations valued at US$370mil (RM1.5bil) and operation & maintenance (O&M) services at INR9.2bil (RM520mil).
• The new charter for the vessel, which will continue to be deployed at the ONGC D1 field located off the west coast of Mumbai, India, will commence on 25 September 2020. This effectively replaces the temporary 1-year charter extension which began in 20 April this year.
• The US$360mil vessel was initially chartered under a 7-year firm charter valued at US$620mil, which excludes 6 annual extension options. Armada Sterling is the first of the group’s 3 FPSOs to be deployed in India. The other vessels stationed in India are Armada Sterling II for the Cluster 7 marginal field and the unit which is currently being converted for the KG/DWN 98/2 field.
• Including the O&M contract, we estimate that the second charter for Armada Sterling translates to an annual revenue of US$50mil – 44% lower than the original 7-year firm charter as the debt of the vessel has been fully repaid. Our forecasts are maintained as we have already assumed annual extensions to Armada Sterling’s charter.
• We are positive on this development which enhances Bumi Armada’s valuation without any substantive capital outlays, given the group’s extended balance sheet at this juncture. Hence, we still view that Bumi Armada should be able to meet its immediate debt repayment obligations, in which RM680mil is due for repayment within the next 12 months.
• This should be met from the cash flow internally generated from the group’s FY20F EBITDA of RM1.2bil together with due collection from trade receivables which have risen by 60% over the past 6 months to RM671mil.
• Despite the substantively higher receivables, 86% falls within the group’s usual 60-day credit terms compared with 79% in 4QFY19. Management expects trade receivables to progressively taper down towards the end of the year, which should further improve the group’s cash inflow.
• As the group has significantly improved core earnings over the past 2 quarters, we view the 45% discount to BV as unjustified.

Source: AmInvest Research - 25 Sept 2020