Investment Highlights

• Our BUY recommendation is maintained on Bumi Armada with unchanged forecasts and fair value of RM1.22/share, which implies an FY19F PE of 16x.

• Even though Bumi Armada’s share price has retreated by 9% since the recent announcement of a shutdown of its whollyowned floating production, storage and offloading (FPSO) vessel Armada Perdana off Nigeria, we continue to view the risk profile of the group as substantively improved with its clientele’s upcoming full acceptances of the FPSO vessels Olombendo and Kraken, supported by minimal 4QFY17 impairment charges.

• Additionally, Upstream revealed that Bumi Armada has emerged as the unexpected front-runner to land the FPSO charter for Eni’s Zabazaba project off Nigeria in OPL 245. A formal contract award is far from being concluded due to ongoing wrangles over local content and pricing while the OPL 245 is also at the heart of investigations into alleged corrupt practices by Eni and partner Shell.

• Earlier, the bid for Zabazaba’s 150,000 barrels per day FPSO was only between Bumi and a group comprising Bluewater Offshore and Saipem. In early November last year, Upstream reported that Bluewater-Saipem had the edge with the lowest bid of US$5.4bil vs. Bumi Armada’s US$7.6bil.
• However, negotiations over local content, which requires fabrication of 50% of FPSO modules in Nigeria and full local integrate of the topsides, have brought into question Bluewater-Saipem’s pole position.
• Zabazaba’s FPSO would be a converted VLCC that, in addition to oil, will handle 200 million cubic feet per day of gas, 240,000 bpd of injected water and would be able to store 1.7mil barrels of crude. First oil is likely to flow in late 2021, rather than Eni’s original 2020 target.

• Assuming that the capex for the FPSO is similar to Olombendo’s US$1.5bil in Angola with a project IRR of 11%, we estimate that Bumi Armada’s SOP could be raised by 11 sen or 10% to RM1.34/share, if the charter was successfully secured.

• This is a positive development which reaffirms our view that rising opportunities in floating solutions in Latin America, the Gulf of Mexico and Africa offer re-rating catalysts, against the backdrop of a few remaining service providers still able to make a bid following the severe oil price slump in 2015-2017.

• To improve its balance sheet profile, the group plans to issue euro medium-term notes, of which US$1.5bil is still untapped, proposed back in 2013 together with a disposal of minor stakes in completed FPSO projects such as Olombendo once full acceptance has been achieved. The stock currently trades at a compelling FY18F PE of 11x vs. the sector’s 20x with near-term earnings recovery in the horizon.

Source: AmInvest Research - 27 Apr 2018