DEVELOPMENT

• MISC has entered a non-binding Memorandum of Understanding (MoU) with Bumi Armada (BAB: BUY, TP:RM0.85) to mutually explore a prospective share-based merger of the MISC's Offshore Business and BAB.
• The proposed merger will establish a Malaysian-based offshore FPSO-focused entity which leverages the combined talent pool, project development and engineering capability, and know-how of both MISC's Offshore Business and BAB.
• Both MISC and BAB is expected to achieve the objectives of the MoU in 9 months prior to any definitive agreement of the MoU.

OUR VIEW

• Generally positive impact on Offshore segment. The proposed merger is expected to place both MISC and Bumi Armada as a leading global floating production business given the scale, resources and financial capacity of both parties to compete in expand in the offshore FPSO segment. To note, Bumi Armada has 8 operational FPSOs and MISC has 10 operational FPSOs, with each having an average age of 7 years. Combining the strengths of both parties is anticipated to establish a robust entity for FPSO and offshore services, with a potential to expand into LNG vessels in the future.
• Uncertainties in integration remain. The downside risks to this proposed merger include but are not limited to: (i) complex integration of business model, systems and processes, (ii) increased costs acquainted to the merger, (iii) regulatory hurdles that could delay or derail the MoU, and (iv) other external challenges, such as market uncertainty, and geopolitical tensions. At this juncture, the possibility of a termination is still in the decks, although we opine that, given the longer period to continue discussions, both parties would find ways to mitigate the risks, while ensuring that stakeholders will continue to reap the benefits from MISC's dividend play.
• All in all, we maintain positive on this MoU. Both MISC and Bumi Armada are prominent OGSE companies with a shared expertise in FPSOs for the upstream division. Given that the global upstream division is expecting a steady growth in capex (expected USD617b in CY25, USD650b in CY26), we believe that the proposed merger is timely. Both parties could utilise each other's expertise in the FPSO market, consequently leading to a more efficient operations and higher cost savings. For MISC, this proposed merger is in tandem with its strategy to streamline its FPSO fleet while maintaining focus on low-carbon solutions for its newbuilds by pooling resources and expertise to ensure a smooth energy transition within the new entity.
• As of writing, the proposed merger is still in its preliminary stage and thus far, no stakes were disclosed over its completion, should both parties proceed with further assessment and due diligence. Hence, we make no changes to our forecast projection for MISC prior to this update, and maintain our BUY call, with a target price of RM8.95. For Bumi Armada, we also maintain our BUY call, ahead of the group's 3QFY24 results, with a target price of RM0.85.

Source: MIDF Research - 15 Nov 2024