INVESTMENT HIGHLIGHTS

• Bumi Armada’s (BAB) is selling off Armada Perdana FPSO for a total consideration of USD40.0m

• Sale of Perdana is in-line with BAB’s growth strategy

• USD5.0m to be recognised as gain from the sale in FY19

• FY19F earnings lifted by RM20.9m to include the oneoff gain however; FY19-20F normalised earnings maintained

• Maintain BUY with an unchanged TP of RM0.38

The sale of Armada Perdana FPSO. Bumi Armada Berhad (BAB) announced on Friday that its wholly owned subsidiary Armada Oyo Limited (AOL) has entered into an agreement with Century Energy Services Limited (CESL) for the sale of its unutilised Armada Perdana FPSO for a total consideration of USD40.0m or RM167.2m - based on last Friday’s RM/USD exchange rate of RM4.18. Post-sale, CESL is planning to re-deploy the vessel which has a production capacity of 40,000bpd and a storage capacity of 1.11mbbls to another field in Nigeria.

Payment details. The payment schedule for the sale of Armada Perdana is expected to be as follows. Following this we understand from the Management that; USD5.0m or RM20.9m will be recognised as gain from the sale of the vessel in FY19.

Sale in-line with BAB’s growth strategy. The sale of Armada Perdana FPSO does not come as a surprise to us as the company has been guiding since early this year that it is looking into cost effective ways to manage and grow the business. This include sale of its idle and unutilised vessels to among others; reduce cost incurred from maintaining the idle vessels. As of June 2019, it has successfully sold six (6) of its idle OSV vessels which brings its current OSV vessels count down to 37. With the sale of Armada Perdana, BAB now owns four (4) wholly owned FPSOs, three (3) jointly owned FPSOs and one (1) liquefied natural gas floating storage unit.

Recall that, the operations of Armada Perdana FPSO was suspended back in June 2017 after irregular payments made by Erin Petroleum Nigeria Ltd but oil produced by the field was still allowed to flow into the vessel. However, in April 2018 operations were stopped completely due to Erin Petroleum Nigeria Ltd along with its parent company Erin Energy Corporation filed for bankruptcy under Chapter 11 of the US Bankruptcy Code. Subsequently in October 2018, Bumi Armada received a notice that a manager has been appointed in Nigeria to oversee the sale and disposal of the crude oil stored in Armada Perdana of which, the proceeds will later be used to further pare down BAB’s borrowings.

Impact on earnings. Due to the one-off gain from the sale of Armada Perdana we have lifted our FY19F earnings by RM20.9m to incorporate the gain from the sale. Meanwhile, we are maintaining our FY20F earnings pending further announcement on the possible gain to be recognised in FY20F whilst our normalised earnings for both FY19- 20F remains at this juncture.

Reiterate BUY recommendation. We are expecting operating condition for BAB to continue improving with its ongoing cost optimization initiatives bearing fruit. Coupled with improved earnings visibility given its orderbook of RM18.9b and optional extensions of up to RM9.9b, we are reiterating our BUY recommendation on BAB with an unchanged TP of RM0.38 per share. Our valuation is based on PER20 of 8.0x pegged to EPS20 of 4.0sen.

We are also positive on the growing contribution from its FPO segment which has seen commendable improvements attributable to the better contribution from both Armada Kraken and Armada Olembendo. Meanwhile, OMS segment will continue to face headwinds as the OSV segment (especially the higher brake horsepower vessels) due to the oversupply state and low charter rates. However, we are comforted by the fact that higher activity levels has seen to be taking place since earlier this year which has led to higher utilisation rates as evident during 2QFY19. Furthermore, Management has also taken the initiative to dispose of the vessels that are idle and unutilised in its bid to manage costs.

Attractive valuation reiterates buying opportunity. Bumi Armada is currently trading at below -1SD of its 5- year average PER of 22.2x which we opine presents a strong and attractive buying opportunity for the company given its improving operational condition. Historically, BAB has traded up to 31.6x PER and this was back in 2015.

Source: MIDF Research - 10 Sept 2019