Target RM5.05 (Long Term: Out Perform)

 

Bumi Armada's new JV with Fugro marks its maiden foray into the well service market and first step towards securing a marginal field contract. Separately, Upstream wrote that EnQuest aims to sign up the winning bidder for Kraken FPSO work in Oct.

 

We continue to value the stock at 21.8x CY14 P/E, a 40% premium over our market target of 15.6x, but still within the historical P/E range of oil-&-gas big caps. Bumi Armada's long-term FPSO contracts should support a 3-year EPS CAGR of 18.3%. Its strong FPSO contract pipeline is a re-rating catalyst that underpins our unchanged Outperform call.

What Happened 
Bumi Armada said in a press release that it has formed a 51:49 JV with a Dutch firm, Fugro, to target jobs in the well service market. The JV will be manned by a multi-disciplinary team made up of members of both companies with skills in marine operations, well intervention and drilling operations.

Meanwhile, online industry publication, Upstream, has reported that UK independent, EnQuest, aims to sign a letter of intent with either Bumi Armada or Norway's Teekay for work on the Kraken development in the UK's North Sea in early Oct. The competition is too close to call.

What We Think 
We are excited about the JV as it marks Bumi Armada's maiden venture into the expanding subsea market. We also see it as the company's first step towards direct involvement in a marginal field development after completing FPSO work with Petrofac on the latter's Sepat marginal field in FY12.

With six FPSO contracts under its belt, Bumi Armada is actively bidding for 12 more that are concentrated in Asia, Africa and South America. We remain positive on its chances of securing the US$1bn Kraken contract. If clinched, it would mark the company's first undertaking in the North Sea. Current order book and extension options are worth RM7.5bn and RM4.3bn, respectively.

What You Should Do 
Stay invested. Bumi Armada's earnings visibility is good given the long-term nature of FPSO contracts. Their primary terms will last till 2022, but extensions could stretch until 2029.
 

Source: CIMB Daybreak - 02 September 2013, Full PDF report