- We maintain our BUY call on Bumi Armada but with a lower SOP-based fair value of RM4.52/share (vs. an earlier RM4.95/share), which implies an FY15F PE of 25x – at par with oil & gas stocks with market valuations above RM1bil. Upon completion of the group’s proposed 1-for-2 rights and 1-for-2 bonus issue exercise (expected to be completed in 3QFY14) our SOP may drop to RM2.64/share.

- We have lowered Bumi Armada’s FY14F-FY16F earnings by 16%-21% as the group’s 1HFY14 net profit of RM163mil (-26% YoY) came in below expectations, accounting for 31% of our earlier forecast and 32% of street’s RM507mil. As expected, the group did not declare any interim dividend.

- Our FY14F-FY16F EBIT margin assumptions for the floating, production, storage and offloading (FPSO), offshore support vessel (OSV), and transport & installation segments (T&I) have been trimmed by 1ppt, 3ppts, and 5ppts respectively.

- Following from the group’s change in earnings recognition from operating to finance lease for its new floating, production, storage and offloading (FPSO) vessels, the earnings accretion from the Kraken and Angola vessels has been much lower than expected due to the initial slow phase during the conversion period.

- While management expects earnings recognition for the Kraken FPSO, which will be moving into actual construction phase, to significantly improve in 2HFY14, this together with the initial low margin phase of the Angolan FPSO conversion, will be unlikely to meet our earlier expectations.

- Additionally, the EBIT margins for the OSV and T&I segments had halved in 1HFY14 due to the lower utilisation of older Class B vessels and lower utilisation of Armada Hawk caused by the cold Caspian weather.

- Sequentially, the group’s 2QFY14 net profit rose by 52% QoQ to RM98mil due to:- (1) initial contributions from the Kraken FPSO and minimal contributions from the Angolan project, which retrospectively started on 31 March 2014; and (2) 76% rebound in T&I revenue due to winter conditions in the Caspian Sea and completion of Armada Hawk’s charter.

- With an effective 50% stake in the Madura FPSO charter, the group’s firm order book had surged by 9% to RM23bil, and the total order book (including existing options) rose by 6% to RM35bil, which is above SapuraKencana’s current RM25bil. The group is bidding for six FPSO projects which could involve capex of US$1bil-US$1.5bil each in Brazil, Ghana, Nigeria, Angola, and Namibia; the tender results for 4 may be announced in 4QFY14. This increasingly visible project pipeline underpins the stock’s re-rating catalyst.

- Based on our estimates, Bumi Armada’s net gearing of 0.7x as at 31 Dec 2013 could rise to a still comfortable level of 1.5x by end-FY15F with the progressive construction of the Kraken and Angolan FPSOs.

- Bumi Armada now trades at an attractive FY15F PE of 19x – 24% below its peers’ 25x.

Source: AmeSecurities