- We maintain our BUY call on Bumi Armada but with a lower SOP-based fair value of RM4.95 /share (from an earlier RM5.25/share), which implies an FY15F PE of 23x – a 15% premium to oil & gas stocks with market valuations above RM1bil.

-  We have lowered our FY14F-FY16F earnings by 3%-4% as the equity stake of 49.9% for the Madura floating production, storage and offloading (FPSO) vessel charter is lower than our earlier assumption of 100%. The Madura FPSO now accounts for 5% of our SOP and contributes minimally in FY14F-FY15F due to the group’s recently revised accounting methodology for earnings recognition from operating to finance lease for its FPSO vessels.

-  As highlighted in our earlier reports, Bumi Armada and its joint-venture partner PT Armada Gema Nusantara have received a letter of intent (LOI) from Husky-CNOOC Madura Ltd to supply an FPSO for the Madura BD field, 65km east of Surabaya and 16km south of Madura Island, Indonesia.

-  The FPSO charter will have a value of RM1.18bil over a fixed period of 10 years and options worth US$147mil to extend for 5 more years. This will be the eighth FPSO under the group’s expanding fleet, and will cost around US$400mil, much smaller than the recently awarded Angolan FPSO (which will cost US$1.5bil) and the US$1bil Kraken project.

-  With the award of the Madura FPSO firm charter, the group’s firm order book has surged by 15% from RM22.7bil to RM26bil, and the total order book (including existing options) by 12% to RM35.4bil, which is above SapuraKencana’s current RM25bil.

-  Besides its already huge order book, the group has submitted 4 tenders, involving capex of up to US$3bil, in Indonesia, Namibia, Ghana, and Mexico. It is also working on 6 additional projects which could potentially cost up to US$10bil, including a US$2bil floating liquefied natural gas project at Equatorial Guinea in Central Africa. This increasingly visible project pipeline underpins the stock’s rerating catalyst.

-  The impact of the Madura FPSO will not have a significant impact on the group’s net gearing as most of the vessel’s debt will not be consolidated under equity accounting. Based on our estimates, Bumi Armada’s net gearing of 0.7x as at 31 Dec 2013 could rise to 1.4x by end-FY15F from the Kraken and Angolan FPSO. Hence, the rights issue – which could raise proceeds of RM2.2bil (assuming rights price of RM1.52/share) and mitigate the rising gearing levels – will widen the group’s exciting playing field of huge multiple projects globally.

-  Bumi Armada now trades at an attractive FY15F PE of 16x –20% below its peers’ 20x.

Source: AmeSecurities