- We upgrade our call on Bumi Armada from HOLD to BUY with an elevated sum-of-parts-based fair value of RM5.15/share (from an earlier RM4.30/share) which implies an FY14F PE of 23x- a 15% premium to oil & gas stocks with market valuations above RM1bil. Bumi Armada rerating prospects stems largely from the imminent and improved visibility of three floating production storage and offloading vessel charters, which will be announced by the end of next month.

- Notwitstanding the recent arrest of SKKMigas' chairman for alleged corruption, the group looks set to secure the FPSO charter next month for the Madura BD gas condensate development in Indonesia, which Upstream reported could be worth US$1.18bil. Bumi Armada most likely edged out the only other contender – the Silo Maritime-Emas OffshoreFederal Offshore consortium - with a more competitive bid. The conversion of the 1999-built Rainbow River tanker will take 28 months before undertaking the 10-year charter with an option to extend another 5 years.

- While this development is in line with expectations and management’s target as the group will be securing two FPSO charters this year, the group’s valuations driver will be the upcoming Kraken FPSO project, which will cost US$1bil vs Madura’s US$400mil. As with the FPSO tender for Afren’s Okoro block off Nigeria, there are only two shortlisted bidders.

- All in, management indicated that Bumi Armada is actively involved in tenders for 12 overseas FPSO and 5 floating storage regassification unit (FSRU) charters - potentially underpinning an upward re-rating cycle for consensus earnings in FY14F onwards.

- Hence, we have raised the group’s FY14F-FY15F earnings by 7%-8% by including an additional FPSO charter, which means an assumption of two charters secured at the beginning of FY14F.

- But we maintain Bumi Armada’s FY13F earnings as its 1HFY13 net profit of RM22mil was generally in line with expectations, accounting for 43% of our FY13F earnings and 41% of street’s RM525mil. While this appears low compared to 1HFY12, which accounted for 47% of FY12 net profit, we expect stronger contributions from the recently secured Cluster 7 FPSO job, maiden contributions of a new FPSO charter and stronger contributions from the transport & installation division coupled with higher vessel charter/utilisation rates.

- Sequentially, the group’s 2QFY13 revenue and net profit were flat, as a lower effective tax rate of 7% (-9%-point QoQ) was offset by lower associate contributions due to capitalised financing costs for the D1 FPSO project.

- After our earnings upgrade, the stock now trades at a highly attractive FY14F PE of 17x – 15% below its peers’ 20x.

Source: AmeSecurities