Bumi Armada (BAB) announced that it has secured a US$75m (RM317m) financing commitment from Usaha Tegas via Mezzaine Equities (its major shareholder). This is positive news as the funding support is timely for ONGC’s FPSO DWN 98/2 project and should alleviate investor concern of the need for a rights issue. We maintain our BUY call and raise our target price to RM0.45 (from RM0.34).

US$30m for ONGC Project and US$45m Malta Refinancing

Out of the total US$75m funding, US$30m will be used to fund BAB’s 30% equity stake in ONGC’s FPSO DWN 98/2 project via a 3-year term loan. In return, Mezzaine Equities has the option to acquire BAB’s 30% stake in the project within 36 months from the date of the grant or facility being fully repaid, whichever is later. This is not an exclusive arrangement as BAB has the alternative to divest its stake to any third party during the option period. BAB will also refinance the FSU Malta bridger loan amounting to US$45m by converting it to a longer-term 6-year term loan. No further details were disclosed on the incremental interest cost.

We Are Positive as Stars Are Beginning to Align

We view positively the funding support by its major shareholder as it should alleviate investor concern of the need for a rights issue. With stars starting to align, we believe BAB’s valuation will re-rate gradually over time. Further rerating catalysts to look forward to in the near term include the reclassification of FPSO Kraken’s RM1.5bn debt, outcome of the FPSO Claire court case in 4Q19, progressive improvement in FPSO Kraken’s operation (fixing water filtration unit) and cost savings from the recent FPSO Perdana disposal that have not yet been fully factored in by the market, in our view.

Maintain BUY and Raising Our 12-month Target Price

We make no changes to our earnings forecasts due to a lack of details on the incremental interest cost, but raise our SOTP-based target price to RM0.45 (from RM0.34) after incorporating a lower WACC of 6.5% (from 7.3%) to reflect lower stock volatility, in view of the improving business outlook. Our revised target price implies a 8x FY20 PER, in line with the preKraken impairment valuation in 2018. Downside risks include weaker-thanexpected OSV fleet utilization, continual late deployment of subsea vessels and termination of existing FPSO contracts.

Source: Affin Hwang Research - 27 Sept 2019