- Exciting mergers and acquisition news flow is beginning to emerge from attractive valuations offered in the current downturn of crude oil prices. We are revisiting our view on the sector, which remains Neutral for now.

- The Star reported on the weekend that MISC and Bumi Armada are in early stages of exploring a corporate exercise involving the consolidation of the floating production storage offshore (FPSO) businesses of both companies.

- The exercise, if it materialises, could involve MISC, 63%-owned by Petronas, injecting its FPSO businesses into Bumi Armada via a share swap. This could lead to Petronas ultimately owning a substantial stake in Bumi Armada, which subsequently transforms into the national oil & gas company’s FPSO division.

- Bumi Armada currently has 9 FPSOs compared with MISC’s 6 FPSOs. Combining the 2 fleets would result in Bumi Armada’s 16 FPSOs leapfrogging from the fifth to second-largest global FPSO operator, just below BW Offshore’s 17. Additionally, MISC also has 4 floating storage offloading (FSOs), 2 floating storage units (FSUs), 2 mobile offshore production units (MOPUs) and the Gumusut-Kakap semisubmersible floating production system.

- Based on the remaining contract tenures of MISC’s FPSOs, our back-of-the-envelope estimates show that the purchase price could reach RM1.6bil, or price acquisition multiple of 10x. For Bumi Armada, this could enhance its FY16F EPS by 5% while MISC’s by a marginal 1%. If this deal materialises, MISC’s stake in Bumi Armada could reach 28% while Ananda Krishnan’s effective stake (via Objektif Bersatu) could drop from 34.9% to 27%.

- However, negotiations on pricing may need to be ironed out given that Bumi Armada is currently trading at a 14% discount to its book value of RM1.16/share and 34% discount to our SOP of RM1.51/share. Meanwhile, MISC is trading at a premium of 15% to its book value of RM8.03/share.

- Bumi Armada is the clear winner of this reported development, although MISC will also benefit from the former’s proven track record in securing overseas projects. Bumi Armada, which presently does not have any domestic FPSO operations, would automatically have an advantage in securing new contracts over other local and foreign operators in Malaysia. As the government and Petronas have plans to groom the country’s oil & gas players into regional contenders, we expect further positive developments from this news.

- While this news is generating significant re-rating signals for Bumi Armada and MISC, we maintain our HOLD calls pending further details from management. Our BUY calls are on Yinson Holdings, SapuraKencana Petroleum and Dialog Group.

Source: AmeSecurities Research - 9 Nov 2015