• ONGC awarded Armada Sterling I with a 10+5 years bareboat charter and operational and maintenance contract. The firm contract period will expire in 2030 with extension option until 2035
• Total contract value of RM2.1bn can be split into BBC (RM1.54bn) and O&M (RM520m)
• Reiterate Buy rating with unchanged SOTP-based target price of RM0.39

10+5 Years BBC and O&M Contract for Sterling I

Bumi Armada (BAB) announced that India’s ONGC has extended Armada Sterling I with a new 10-year firm contract with an annual extension option of up to 5 years, for the bareboat charter (BBC) and operation and maintenance (O&M). The contract value is split into RM1.54bn and RM520m respectively. This will supercede the previous options which were supposedly to expire in 2026.

Positive on Extended Visibility

We are positive on this news as this new contract would provide an additional 9 years of visibility to Sterling I, as compared to the previous contract. Based on our back-ofenvelope calculation, Sterling I revenue could fall by 12% vs 2019, with profit contribution ranging RM46-48m, translating to 11% to our current FY21 profit forecasts. By end-2020, we gather that Sterling I would have fully paid its loan with depreciation to last for another 6 years.

Resilient Earnings Amid Downturn, Reiterate Buy Rating

Despite the stellar 2Q20 results, BAB’s share price performance has been lagging, which we attributed to sector sentiment, and investor skeptism over the result sustainability. We continue to see BAB as an undervalued sector laggard play, with <4x FY21E PER valuation. We believe as long as BAB continues to deliver sustainable earnings in the coming quarters without any hiccups, this would help to re-rate the current share price. Any impairment write-back relating to Armada Kraken would be a re-rating catalyst as well. We reiterate our Buy call with an unchanged target price of RM0.39, which implies closer to 5.5x PER (which represents a 33% discount to its historical valuation pre Kraken impairment).

Risk to Call

Downside risk to our Buy call include a weaker OSV fleet utilisation and unexpected termination of existing FPO contracts. BAB is in the midst of negotiating to extend its RM679m debt falling due by May 2021.

Source: Affin Hwang Research - 28 Sept 2020