News

• StarBizWeek and TheEdgeWeekly reported that Bumi Armada and MISC are said to be in early stages of exploring a corporate exercise involving the consolidation of the FPSO business for both companies. Sources say the exercise could see MISC injecting some of its offshore facilities into Bumi Armada in return for shares. MISC’s offshore facilities business includes 6 FPSO, 4 FSO, 2 MOPU, 2 FSU and 1 semi sub floating production.

• In addition, the injection exercise could also involve the sale of MISC’s 51% stake in FPSO Ventures Sdn Bhd which provides operation and maintenance services to offshore floating systems in the O&G industry.

Comments

• With the injection, Bumi could become the largest lease and operate FPSO in the world with total 15 units of FPSO (3 are under construction), surpassing SBM Offshore (13 units) and BW Offshore (14 units).

• According to our in-house estimate, MISC offshore facilities business could value at RM10.5bn (based on DCF valuation) with earnings cont ribution of RM848m in FY16. This will implied acquisition of 12.4x FY 16 P/E which is almost similar to Bumi Armada current FY16 P/E at 12.5x. Hence, this will be neutral and no dilution to its EPS.

• This exercise will increase Bumi earnings from RM466m to RM1.3bn and market cap from RM5.8bn to RM16bn. If the exercise is entire finance through new share issue, MISC could end up as a substantial shareholder of Bumi with 64% if the new shares are assumed to be issue at RM0.995 per share (current share price) and T Ananda Krishnan’s share will be diluted from 34.9% to 12.4%.

• We believe the consolidation of the FPSO business is possible as both companies have similar business model. If the corporate exercise materialised, Bumi Armada would become a FPSO arm of Petronas. This would help Bumi Armada to secure more local jobs since majority of its orderbook are from oversea.

Risks

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

Forecasts

• Unchanged.

Valuation

• We maintain our BUY call with unchanged TP of RM1.15 based on SOP valuation method.

Source: Hong Leong Investment Bank Research - 9 Nov 2015