Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged sumof-parts (SOP) based fair value of RM0.83/share, which also reflects a neutral ESG rating of 3 stars and implies an FY22F PE of 8x, half of the FBM KLCI.

• Our forecasts are maintained for now pending further revelations from the Indian government’s prosecution of corruption charges against Bumi Armada and related company Maxis Communications.

• The Indian Central Bureau of Investigation and the Indian Enforcement Directorate have initiated proceedings against several companies including Bumi Armada and related company Maxis Communications together with India’s former Finance Minister Palaniappan Chidambaram (Palaniappan) and his son Karti Chidambaram (Karti).

• The prosecution alleges that Palaniappan illegally granted Foreign Investment Promotion Board approval in 2006 for an indirect investment into Aircel Limited by Maxis Communications as quid pro quo for Bumi Armada remitting US$104K (<1% of Bumi Armada’s FY22F earnings) to Chess Management Services, a company controlled by Karti between 2007 and 2009.

• Bumi Armada, which indicated willingness to cooperate with the authorities, claims that payment of those sums to Chess were for IT solutions software and server hosting services.

• Based on the group’s outstanding order book of RM13.4bil as at 31 Dec 2021, 18% stem from 4 joint ventures with its Indian partner Sharpoorji Pallonji, a globally-renowned Indian conglomerate.

• Currently, Bumi Armada has the following equity stakes in India-based projects:

• 49% stakes in Sterling and Sterling II floating production, storage and offloading vessels (FPSO) which are currently operating at ONGC’s marginal D1 and Cluster-7 fields off Mumbai.

• 30% stake in Armada Sterling V FPSO for the ONGC NELP Block KG – DWN 98/2 Development Project Cluster-II field to be located on the east coast of Kakinada, offshore India. While the conversion progress was impacted by Covid- 19 movement control restrictions, the vessel completion has reached over 82% at this stage at Semcorp Marine’s yard in Singapore.

• 49% equity stake in a 30-year concession to operate a floating storage regasification unit at the Port of Mumbai.

• Excluding Bumi Armada’s 49%-stake in Karapan Armada Sterling III FPSO stationed at the Madura BD field, off East Java, Indonesia, we estimate that the group’s exposure to India-based projects accounts for 12% of its outstanding order book currently. Likewise, we reckon that India accounts for 12% of Bumi Armada’s FY21 pretax profit.

• At this juncture, we are not overly concerned that the Indian contracts already awarded to these JV companies may be impacted given that neither the group’s partner, Sharpoorji Pallonji nor its management is currently implicated in this case. Furthermore, the actual sum involved appears to be relatively immaterial to Bumi Armada’s earnings.

• Hence, we view any potential share price weakness from this development as offering better buying opportunities. Valuation-wise, Bumi Armada’s FY22F PE of 4x is already grossly unjustified vs. the FBM KLCI’s 16x as the group has stabilised its core earnings and balance sheet health with the normalisation of Armada Kraken’s operations since 4QFY20.

Source: AmInvest Research - 20 Apr 2022