This article first appeared in The Edge Malaysia Weekly on July 26, 2021 - August 1, 2021

AT its close of 42 sen last Wednesday, oil and gas outfit Bumi Armada Bhd (BAB) was valued at historical price earnings of about 5.25 times and below its net tangible asset per share of 58 sen. At this level, is the counter worth looking at?

One fund manager with a foreign fund management company says the low valuation could be a result of issues related to some problematic contracts in the past.

“If you compare BAB with some of its competitors, perhaps it is cheaper, but that is because of the many problems of the past. It (BAB) did not live up to expectations and faced several issues for various reasons. But after following the company for a number of years, I dare say the worst is behind it,” he says.

Some of the past issues include a force majeure that resulted in a shutdown of operations at floating production storage and offloading (FPSO) unit Armada Perdana in Nigeria in 2018. This came after years of problems with Erin Petroleum Nigeria Ltd, which owed large amounts to BAB. Another FPSO, Armada Claire, had legal issues with Woodside Petroleum in Western Australia in 2016, and the company’s US$1.4 billion (RM4.6 billion when the contract was signed in December 2013) FPSO Kraken contract, which had options for 17 annual extensions, faced issues with viability as oil prices tumbled.

Added to that, the company suffered hefty losses of RM2.3 billion in FY2018 and RM1.97 billion in FY2016, which put off many investors.

With nine FPSOs, Bumi Armada has the world’s fifth-largest fleet; Yinson Holdings Bhd, with six vessels, is one rung below. At Wednesday’s close of 42 sen, BAB’s market capitalisation was RM2.48 billion. Yinson was trading at a price-earnings ratio (PER) of 14.29 times and had a market capitalisation of RM5.53 billion. Last Wednesday, its closing price of RM4.98 was 2.62 times its NTA of RM1.90.

Confidence in the company, despite its chequered past, seems to be building up, and research houses such as Hong Leong Investment Bank have BAB as their top pick in the oil and gas sector. HLIB pegs a target price of 80 sen on the company’s stock, which is a 90% premium to last Wednesday’s close of 42 sen.

In an end-May report, HLIB says, “We expect BAB’s consistently strong earnings to continue in the foreseeable future as 1Q2021 operating cash flow before working capital has remained robust at RM328 million (up 3.2% year on year). Consequently, its current net debt has declined by about RM1.6 billion to RM7.2 billion (from RM8.7 billion in 1Q2020), net gearing has also fallen from 2.9 times in 1Q2020 to 2.1 times in 1Q2021 and is expected to fall further in subsequent quarters while interest cover has improved to four times in 1Q2021 (from 2.8 times in 1Q2020).”

Other houses such as Public Investment Bank, Maybank Investment Bank, Kenanga Investment Bank, RHB Investment Bank and Affin Hwang Investment Bank view BAB positively as well, but their target prices range from 45 sen to 58 sen.

CGS CIMB, meanwhile, has downgraded BAB to a “hold” after a run in its share price. Over the past 12 months, BAB’s stock (which was trading at 24 sen a year ago), has gained 70.83%. CGS CIMB has a target price of 48 sen.

Macquarie Capital Securities, which has a “neutral” call on BAB with a target price of 43 sen, says in a report in early June: “Buoyant sentiment in the oil and gas sector from improved oil prices is helping to prop up BAB’s valuations. As long as the recent trend of stabilised earnings continues, we see diminishing downside risk for BAB. However, upside is also capped by a weak balance sheet, which hinders investment in new projects.”

It is also noteworthy that BAB’s current order book at roughly RM15 billion may seem high but is actually considerably lower than five years ago, when it was bursting at the seams at RM27.5 billion, with optional extensions worth RM15.3 billion to boot.

However, a recent contract signed in May — via a 49:51 joint venture with Sharpooji Pallonji Oil and Gas Pvt Ltd to set up, operate and maintain a floating storage and regasification unit (FSRU) under a 30-year licence agreement with the board of trustees of the Port of Mumbai — could add some excitement.

BAB and its partner have 270 days to fulfil certain conditions precedent, which include securing financing, permits for construction and getting the FSRU.

While details are scarce, RHB Investment Bank says the project may be worth five sen a share to BAB. Macquarie, meanwhile, pegs the earnings from the Mumbai FSRU at four sen a share and highlights the likely difficulty in raising funds. “We see financing as a key hurdle to this project,” Macquarie says.

For the three months ended March this year, BAB chalked up net profits of RM162.79 million from RM562.7 million in revenue. Earnings per share (EPS) for the three months was 2.77 sen. In the previous corresponding period, the oil and gas company suffered a net loss of RM223.97 million on the back of RM552.62 million in sales.

Of all the analyst’s reports viewed by The Edge, Affin Hwang’s net profit estimate for FY2021 is the highest at RM526.7 million (EPS of nine sen).

As at end-March, BAB had deposits, cash and bank balances of RM975.21 million while long-term borrowings and short-term debt commitments stood at RM6.93 billion and RM1.21 billion respectively.

It is noteworthy, however, that BAB had in February this year amended the maturity date for a RM1.05 billion (US$260 million) facility from May this year to November next year, which should ease some pressure with regard to its short-term borrowings.

Nevertheless, BAB’s finance costs for the three months ended March was a whopping RM101.63 million. It had a net gearing of 2.08 times, which is high but down from 2.9 times as at end-March 2020. Accumulated losses stood at RM874.65 million as at end-March.

It is also noteworthy that BAB’s largest shareholder is billionaire tycoon Tatparanandam Ananda Krishnan, who holds 34.8% equity interest via Objektif Bersatu Sdn Bhd. The other substantial shareholder is Permodalan Nasional Bhd, which has close to 13% equity interest via its various funds.

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