Company Insight

We recently met management of Bumi Armada for an update on the company. We also gathered that its 1QFY14 results release is expected to be on 20 May.

Performance in the Offshore Support Vessels (OSV) and Transportation and Installation (T&I) divisions seem to be running more smoothly than last year which was plagued with one off problems in Africa and low utilisation. The company is also seeing demand strengthen as domestic O&G activities intensify. Current FPSO bids Kraken (North Sea), Belud (Malaysia) and Maudra (Indonesia) are still on the table as well as potential entry into Marginal fields. In addition, there are potential bids in Angola and Brazil.

Comment

We came away from the meeting feeling positive about future prospects and on our recent BUY upgrade. Although we concede award timing is uncertain, we continue to believe the company will could secure a total of 2 mid-sized FPSO’s (one maybe a marginal field development) and one a year in FY 2014 and beyond. Meeting our expectations and surprising the market on the upside.

Bottom? When we initiated with a HOLD call on 17 Jul 2012 at a price of RM4.03, the market was relatively bullish with only a mere 18% SELL calls. By Feb 2013, SELL calls had increased to 30% as price dipped to RM3.65 as sentiment deteriorated. Although 1QFY14 results will be well below ours and consensus forecasts due to a lack of FPSO wins, we believe this has been factored in and stock specific sentiment may have bottomed. The decrease apparent bottoming of SELL calls (currently SELLs make up 27% of estimates) and strength during election uncertainty supports this hypothesis. Consistent with our view that offshore O&G is in a cyclical upswing (detailed in our report titled ‘Evolution of an Upswing’ dated 16 Apr), we remain bullish on the size of the FPSO market but still prefer offshore operators such as SapuraKencana (BUY, TP RM4.40), Dayang (BUY, TP RM4.00), Perdana Petroleum (BUY, TP RM1.83), Perisai (BUY, TP RM1.55),. However, fundamentals remain robust and based on our assumptions, valuations for Bumi Armada are becoming compelling.

Risks

• Increased competition, as new players enter the market.
• Execution risk, including oil spills and their clean-up costs.
• Unusual high portion of vessels dry docking or under repair.

Forecasts

Maintained. BUY

• Positives –
  • Excellent management and reputation.
  • Ability to ride the growing offshore global trend.
• Negatives –
  • Increased competition makes growth more complex.
  • Potential delays in securing contracts.

Valuation

• We maintain our BUY rating and TP of RM4.88 based on unchanged 20x FY14 EPS of 24.4 sen/share.

Source: Hong Leong Investment Bank Research - 15 May 2013