INVESTMENT HIGHLIGHTS

• Bumi Armada secured an FPSO charter contract from India’s state-owned oil company ONGC

• The FPSO charter contract is worth RM8.8b for a period of 9 years with an option to extend to another 7 years

• Contract to contribute positively however, operations will remain challenging for BAB

• FY19-20F earnings forecasts maintained

• Maintain NEUTRAL with a revised TP of RM0.25 per share

Contract secured for FPSO charter. Bumi Armada Berhad (BAB) announced that its joint-venture company Shapoorji Pallonji Bumi Armada Godavari Private Limited (SPBAG) has received a notification of award from India’s state-owned oil company Oil and Natural Gas Corporation Limited (ONGC) for the charter hire and operations of one of its floating production, storage and offloading vessel (FPSO). The JV entitles BAB for a 30% of the contract value.

Contract details. The contract secured for its FPSO is for a period of nine (9) years, valued at approximately USD2.1b or RM8.8b – which translates to annual revenue of about RM293m. The ONGC has also included an option to extend the contract for an additional seven (7) years on a yearly basis at an aggregate contract value of approximately USD655m or RM2.7b, if all extension options are exercised – which translates to about RM116m in annual revenue. The contract is also expected to be executed in ONGC’s NELP Block DWN 98/2 Development Cluster-II field which is located off the west coast of Kakinada in India.

Contract is expected to contribute positively however... We note that the new FPSO charter contract will contribute positively to BAB’s earning going forward however, we remain wary on BAB’s high gearing ratio which was recorded at RM10.4b as at end-FY18 (or 2.7x). This, we opine would continue to suppress its growth going forward. Even with the recently secured refinancing of USD660m of its debt, we opine that the rate would be higher than the original debt financing rate which was initially at about 4.7- 5.0%.

Revision in earnings. We are maintaining our earnings forecasts for now as the contract win falls within our orderbook replenishment assumption and also pending the upcoming 1QFY19 earnings announcement due by end of this month.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on BAB with a revised TP of RM0.25 per share (previously RM0.35). Our valuation is based on a revised PER19 target of 11x pegged to unchanged EPS19 of 2.3sen. While we note that the newly secured FPSO charter contract will contribute positively towards BAB’s earnings going forward however; we opine that our Neutral recommendation is fair given that the OMS segment will continue to face headwinds due to the oversupply in the OSV segment (especially the higher brake horsepower vessels), and despite the increased in utilisation rate during the quarter; it is not expected to translate into higher revenue due to persistently depressed charter rates. That said, we opine that the expected continued increase in contribution coming from Armada Olombendo and Armada Kraken FPSOs will assist in mitigating the shortfall going forward following the massive impairment of the Armada Kraken in FY18. Furthermore, a favourable outcome from its legal dispute with Woodside Petroleum where a possible asset sale in one of its operating FPSOs will be an option to raise cash to support the company’s working capital.

Source: MIDF Research - 7 May 2019