Bumi Armada (BAB) announced the disposal of FPSO Perdana to Century Energy Services for US$40m (approximately RM168m). We are positive on this transaction as Perdana has not been generating revenue since 2017, while incurring depreciation and maintenance costs. Upon conclusion of the deal by end-19, BAB will also recognise a US$5m (RM21m) disposal gain. We reiterate our BUY call with a higher SOTP-based target price of RM0.34 (from RM0.31).

US$40m to be Paid Out in Tranches

Out of the US$40m proceeds, BAB will receive US$5.5m by end-19. BAB is expected to receive another US$5m within 6 months of delivery of the FPSO or the field’s first oil, in which the vessel will be re-deployed. From the total proceeds, US$11.6m will be used to settle the amount owed to Century Energy. The remaining US$17.9m will be paid within 2 years from the first oil date. It is uncertain at this juncture how much of the total proceeds will be used to pare down debt, however, we estimate BAB’s net gearing will decline from 2.65x (as of end-2Q19) to 2.6x.

Positive With Lower Costs and Capital Freed Up

We view this disposal positively as impact would be earnings accretive from depreciation and maintenance cost savings. More importantly, this will also free up initial investment used to fund the equity portion of its new ONGC’s FPSO project. BAB had previously suspended Perdana’s operations due to outstanding amounts owed from bare-boat charter (BBC) and O&M by its client (Erin Petroleum) since June 2017. Since then, there was only a oneoff offload which BAB negotiated to be partially compensated, to offset the loss in revenue.

Reiterating BUY; Raising TP to RM0.34

We raise our FY20-21E EPS estimates by 3% on savings derived from this disposal. We also raise our target price to RM0.34 (from RM0.31) to factor in a lower net debt figure in our SOP valuation. BAB’s recent positive newsflow (refinanced its debt in May-19, resolved Kraken power generator issue in 2Q19, higher OMS utilization, and disposal of FPSO Perdana) would suggest that the worst is over for the stock. In our view, valuation should continue to re-rate, closer to 8x (pre Kraken impairment in 2018), in line with implied PER at our target price. The next catalyst would come from positive outcome of FPSO Claire court case in 4Q19, and further improvement in FPSO Kraken operation resulting in potential write backs of impairment.

Source: Affin Hwang Research - 10 Sept 2019