KEY INVESTMENT HIGHLIGHTS

• Bumi Armada secured a new fixed term contract for Armada Sterling FPSO with ONGC India via its 49% JV company

• Additionally, an operations and maintenance (O&M) contract for Armada Sterling FPSO was also secured

• Contracts awarded to strengthen its FPO segment and increases future earnings visibility

• FY20-22F earnings estimates lifted by +5.8%, +5.4% and +8.2% respectively

• Maintain BUY with a revised TP of RM0.69 per share

BAB anchored a BBC lease from ONGC. Bumi Armada Berhad (BAB) announced that it has been awarded a bareboat charter (BBC) contract via its joint-venture (JV) company Armada D1 Pte Ltd (Singapore) from Oil and Natural Gas Corporation Limited of India (ONGC). The contract is for the BBC of the Armada Sterling Floating Production, Storage and Offloading vessel (Armada Sterling FPSO) to be operated in the ONGC D1 field located 200km off the west coast of Mumbai, India. The BBC contract is for a fixed period of 10 years with an option for annual extension for up to additional five (5) years. The contract has an estimated total value of USD370m (or approximately RM1,540.0m) and is effective from 25th September 2020. With the contract award, its previous seven (7) years firm contract for Armada Sterling FPSO with ONGC has officially been replaced with this new fixed term contract. Recall that, Armada D1 Pte Ltd is a 51%-49% JV company between Shapoorji Pallonji Oil & Gas Pte Ltd (SPOGSPL) and BAB.

Secured an O&M contract for Armada Sterling. Following the BBC contract award; BAB also announced that it has secured a 10 years operations and maintenance (O&M) contract via its JV company Shapoorji Pallonji Armada Oil & Gas Services Pte Ltd (India) (SPAOGSPL) from ONGC of India for the Armada Sterling FPSO. The O&M contract has an estimated value of INR9.2b (or approximately RM520.0m) with an option for annual extension of up to five (5) years as well. The contract is effective from 25th September 2020. Recall that, the SPAOGSPL is a 60%-40% JV company between SPOGSPL and BAB.

Strengthening its FPO segment. The contract award from ONGC India did not come as a surprise for us as Armada Sterling FPSO has been serving ONGC for the past seven (7) years and with a consistent high uptime performance. We note that ONGC views highly of the long term viability of its D1 field which has in return translated to the contract award. Nonetheless, we view this award positively as the contract award will not only reaffirm BAB’s specialty in providing FPO services but also provide: (i) better future earnings and cashflow visibility and; (ii) insulate BAB from the current volatile operating climate brought upon by Covid-19.

Earnings impact. The BBC contract is expected to translate to approximately RM75.5m annually in revenue whilst the O&M contract will contribute RM20.8m in annual revenue for BAB for a period of 10 years. This is after we take into account the JV portion of BAB for both contracts secured. Following that, we are revising our FY20-22F earnings by +5.8%, +5.4% and +8.6% respectively after we have imputed the contribution from the new contracts and lower cost of depreciation into our calculation.

Maintain BUY with a revised TP of RM0.69. Following the earnings revision, we are maintaining our BUY recommendation on BAB with a revised target price of RM0.69 (from RM0.65 per share previously). Our TP is premised on an unchanged PER20 of 10.0x pegged to an EPS21 of 6.72sen. Our BUY recommendation is premised on our anticipation that BAB’s FPO segment will continue to be robust in the coming quarters despite the current operating environment underpinned by its long-term charter contracts.

Furthermore, we remain positive on the growing contribution from its FPO segment which has seen commendable improvement since earlier this year attributable to the better contribution from Armada Kraken. Additionally, while its OMS segment’s outlook remains persistently soft in the near future, we opine that this will improve should BAB secure the new contracts it has been eyeing in the Caspian Sea. That said, the timeline for the contract award remains unknown at this juncture.

Source: MIDF Research - 28 Sept 2020