Yesterday, Bumi Armada announced that it has issued a letter of intent (LOI) to Nam Cheong Dockyard SB to build 4 DP2 multi-purpose platform support vessels, with an option for another 4 units at an approximate cost of USD130m (RM400m), excluding owner furnished equipment. This is part of its fleet expansion under the company's 'Steel on Water II' newbuild programme. The 4 vessels are expected to be delivered by 2QCY14.

4 vessels costing a total of about USD130m (RM400m). We note that management's filing with Bursa Malaysia did not disclose the mode of financing for the 4 vessels. Nevertheless, based on its 1QFY12 results, the company had net debts of RM1.8bn, for a gearing of 0.5x. Hence, assuming that the entire RM400m is financed via debt, its gearing will increase to 0.6x, which is still manageable. This increase is also unlikely to be drastic because Nam Cheong will be paid based on percentage of completion, rather than one lump sum upfront.

Positive news but no change to our FY12-13 earnings. This is because the 4 vessels would only be delivered by 2QCY14, assuming there is no delay in their construction. We would only factor in the earnings from these vessels from 2HCY14 onwards.

Maintain Neutral. We are also keeping our fair value on the stock unchanged for now at RM4.16, based on the existing sum-of-parts valuation. We continue to like Bumi Armada for its ability to provide one-stop solutions, starting from the O&G exploration stage up to decommissioning. Also, it is comforting to know that more than 70% of its business generates recurring income and a constant cash flow, which is vital especially amid the current difficult operating environment.

Source: OSK