Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged sum-ofparts (SOP) based fair value of RM0.69/share. Our fair value also reflects a neutral ESG rating of 3-stars.

• Our forecasts are unchanged for now as we await further clarity from management regarding the latest development of remediating Armada Kraken floating production storage and offloading (FPSO).

• Bumi Armada announced that the production of its Armada Kraken FPSO has reached 60% of pre-shutdown levels following the recent start-up of the vessel. This is in line with the group’s earlier target to get the vessel back to production on a phased basis.

• While the timeline of Armada Kraken’s full production restoration plan remains uncertain, we keep our earlier assumption that the vessel may fully resolve operational disruptions within 3 months. Despite the vessel reaching 60% of pre-shutdown production level, we opine that the group may not be able to resume the charging of charter fees to the client given the still-constrained availability of the vessel.

• Recall that our back-of-envelop calculations suggest that an operational halt (and therefore a loss of charter earnings) of 3- 6 months coupled with necessary maintenance expenses may erode FY23F earnings by 11%-23%.

• Meanwhile, the group has also entered a non-binding memorandum of understanding with Navigator Holdings (Navigator), the owner and operator of the world’s largest fleet of handysize liquefied gas carriers, to establish a joint venture (JV) company to provide CO2 shipping and injection solutions in UK. This marks Bumi Armada’s first foray into the burgeoning carbon capture and storage space.

• The 50%-owned JV aims to provide an end-to-end solution for carbon emitters to capture, transport, sequester and store carbon dioxide emissions in line with UK’s Industrial Decarbonisation Strategy.

• The JV is expected to design and implement a value chain of shuttle tankers delivering to floating carbon storage & injection facilities. This is anticipated to help offshore oil and gas emitters with no access to pipeline infrastructure to effectively manage their CO2 emissions.

• We also understand that Bumi Armada and Navigator are in initial discussions with a number of emitters. If these discussions turn out to be successful, the group anticipates the first shipment of CO2 to take place 3 years after taking the final investment decision.

• Based on the estimated price of a newbuild liquefied CO2 carrier of US$150-200mil, the JV might need to fork out a total capex of US$750mil to US$1bil to own a fleet of 5 vessels. This translates to a capex requirement of US$375-500mil for Bumi Armada over the next 3 years, which would raise its FY25F net gearing ratio from 0.17x previously to a manageable range of 0.31x-0.35x.

• Although still at the early stage, we are positive on Bumi Armada’s venture into the CO2 shipping and injection segment which may fundamentally propel the group’s growth trajectory while increasing its ESG profile due to the enormous reduction of carbon emissions to be achieved by the new business.

• Valuation-wise, Bumi Armada is trading at a compelling FY23F PE of 4x vs. the FBM KLCI's 1-year forward PE of 13x. This is underpinned by the sustainable earnings stream from its FPSO operations as well as an improved balance sheet.

Source: AmInvest Research - 22 Jun 2023