Investment Highlights

• We maintain our HOLD recommendation on Bumi Armada with unchanged forecasts and fair value of RM0.79/share based on a 20% discount to our sum-of-parts valuation of RM0.99/share.

• We met up with management recently with these salient findings:

• It strongly refutes any need to resort to a rights issue for major project financing as the group still has an untapped US$1.5bil (RM6.3bil) multi-currency euro medium-term note programme proposed back in 2013.

• Even if Bumi Armada secures a major project, the group will have a strategic partner to share the risk and the capital requirements, while exploring ways to recycle the existing debt for its completed projects by negotiating for a lower equity-to-debt ratio arrangement.

• If a short-term cash need arises, the group can issue a private placement, as a 10% stake could translate to RM420mil.

• Even though the existing shorter term debt covenants limit net debt/adjusted EBITDA - based on floating production, storage and offloading vessel (FPSO) operating lease - to 5.2x vs 4.7x currently and 4.5x as at end-FY18F, we estimate that the group would be able to take on additional debt of RM1.5bil (US$357mil) for the holding company in FY18F.

• We estimate that this is sufficient to take on 2 large FPSOs with capex of US$1bil each, assuming a 50% equity stake by the group. However, management indicates that the group will only opt for 1 large project at a time, given the extensive strain experienced by the group with 4 ongoing projects last year.

• The group has teamed up with Shapoorji Pallonji to bid for an FPSO, potentially costing over US$1bil, for Oil & Natural Gas Corporation’s (ONGC) KG-DWN-98/2 deep-water development off India’s east coast and also Hess’ Tano-Cape Three Points off Ghana, which recently won a territorial dispute with the Ivory Coast, as mediated by the International Tribunal of the Law of the Sea. The group is also looking at similarly large FPSO prospects for Petrobras’ Buzios V, which has a daily capacity of 180K barrels and 6mmsfd of gas and Eni’s deep water ZabaZaba-Etan project in OPL 245 off Nigeria.

• The group’s 50%-owned Madura FPSO has already been fully accepted by Husky-CNOOC Madura in July this year while management expects full acceptance of the FPSOs Olombendo and Kraken by 4QFY17. Olombendo’s charter rates are currently 80% of its entitlement currently with a largely satisfied client while Kraken is only at 60%-70% as daily oil production is only 20K barrels currently with a target to reach 30K barrels by year-end and 50K barrels in 2018.

• While the group’s earnings from 2QFY17 onwards could potentially improve from the full recognition of the FPSOs Olombendo and Kraken, we remain cautious on the company’s near-term earnings trajectory given the uncertainties arising from Kraken’s lower charter payments amid loss-inducing weak OSV charter rates.

• The stock currently trades at a fair FY17F PE of 14x vs. the sector’s 20x due to lingering risks on 2HFY17 earnings recovery.

Source: AmInvest Research - 11 Oct 2017