- We maintain our BUY call on Bumi Armada with an unchanged SOP-based fair value of RM5.15/share, which implies a FY14F PE of 23x - a 15% premium to oil & gas stocks with market valuations above RM1bil.

- The Securities Commission has approved Bumi Armada’s proposal to raise up to RM1.5bil unrated Sukuk programme under the Shariah principle of Murabahah to finance its capital expenditure, working capital and debt refinancing purposes.

- The group’s net gearing of 0.7x as at 31 December 2013 includes gross debt of RM3.8bil (43% of its total debt), which currently wholly comprises conventional loans. For a company to be qualified under the Securities Commission’s revised Syariah compliance listing, the proportion of conventional loan cannot exceed 33% of a company’s total assets. Companies have until 29 May 2014 to dispose their securities to meet this requirement.

- If this Sukuk programme were to be used entirely for debt refinancing, Bumi Armada’s proportion of debt to total assets will drop to 25%, below the Syariah threshold of 33%.

- But the group is also building a RM1bil (RM3.3bil) floating, production, storage and offloading (FPSO) vessel for Enquest’s Kraken project in the North Sea, off United Kingdom. Additionally, Bumi Armada is likely to secure another large FPSO, potentially costing US$1.5bil, for Eni’s East Hub project in Block 15/06 off Angola. Including these new projects, Bumi Armada’s gross debt:total debt ratio could surge further to 62% by FY16.

- Given the huge financing requirements over the next 2-3 years, we do not expect Bumi Armada to be able to maintain its syariah-listing status in the long term, even though this may still be achievable in the medium term. As this could mean a more orderly withdrawal of syariah-compliant shareholders, we are positive on this Sukuk debt programme.

- Besides the Kraken and Angolan FPSOs, the group is still seeking at least 9 other projects, including a US$2bil floating liquefied natural gas project at Equitorial Guinea in Central Africa. The group remains the leading contender for the US$500mil Madura FPSO project in Indonesia.

- These increasingly visible project pipelines underpin a potential upward re-rating momentum for consensus earnings for FY15F onwards. Based on our estimates, Bumi Armada’s net gearing of 0.7x as at 31 Dec 2013 could rise to 1.8x by end-FY15F from the Kraken and Angolan FPSO. This is still within the group’s gearing target of up to 2x.

- The group earlier indicated intentions to raise US$2bil (RM6.6bil) in debt and rights issue. While the proportion of debt to equity is still being considered at this juncture, these M&A activities are likely to catalyse further excitement for the stock. Bumi Armada now trades at an attractive FY15F PE of 16x – 16% below its peers’ 19x.

Source: AmeSecurities