Results /Briefing

Below Expectation: 2QFY14 PATAMI grow 52% QoQ but fell 12% yoy, bringing 1HFY14 PATAMI to RM163m, making up 33% and 32% of HLIB and consensus full-year estimates, respectively.

Deviations

Mainly due to continue weakness in OSV division and slower-than-expected earnings recognition for Kraken and Angola project under finance lease.

Highlights

2QFY14 PATAMI grow by 52% QoQ mainly due to FPSO contribution from Kraken and Angola coupled with increased T&I activities in the Caspian sea after progress was affected by winter season last quarter.

However, OSV division continue to be weak due to low utilisation rate on Class B vessels (>12 years or <8k BHP) coupled with contract completion on certain Class A vessels. Bumi has commenced fleet renewal programmes and is expected to be completed by 4Q14. One Class B vessel was sold in 1H14 with another four in advanced negotiations.

Despite signs of a slowdown in E&P capex, management reassured there is no shortage of potential FPSO projects. Bumi target to be the 4th largest FPSO player and working on 5 bids with a combined capex of more than US$5-8bn in Brazil and West Africa. Management expects the result of four tenders to be known by 4QFY14.

In the meantime, Bumi has signed a contract for the Angola FPSO. The contract value is US$3bn for a fixed period of 12 years with option of 8 yearly extensions. Work has already commenced in Apr 14 with first oil expect to be in 4Q16. Including the Madura project win, Bumi’s fleet will expand to 9 vessels with latest orderbook of RM33.3bn.

Given the robust outlook and number of projects to tender, Bumi Armada has proposed 1 for 2 rights and 1 for 2 bonus issue exercises which are expected to raise about RM2.2bn war chest and to be completed by 3Q14. Gearing ratio will fall from 1x to 0.7x. We believe the new FPSO projects will help to offset the dilution from the cash call.

FSRU and FLNG segments provide new growth opportunity going forward. The company will focus on small-scale FSRU and was a short listed bidder for several FSRU projects. We have not captured any contribution from FSRU projects in our earning assumptions. This will be the wildcard for the company and also help to mitigate the dilution from cash call.

Risks

• Increased competition as new players enters the market.
• Execution risk, including oil spills and their clean-up costs.

Forecasts

FY14 and FY15 earnings adjusted downward by 16% and 14% respectively to reflect lower margin assumption on OSV and slower earnings recognition for Kraken and Angola project under finance lease. However, the underlying cash flow for both the FPSO projects remains unchanged.

Valuation

We continue to like the company’s prudent approach in tendering projects and outstanding execution capability. Hence, we maintain our BUY call with TP reduced from RM4.70 to RM4.27 based on SOP valuation method following the earnings revision (reducing SOP on OSV and T&I).

Source: Hong Leong Investment Bank Research - 21 Aug 2014