Bumi Armada Bhd
(Nov 19, RM1.40)
Initiate coverage with “outperform” with a target price (TP) of RM1.77: A growing global oil and gas (O&G) competitor, Bumi Armada is currently the world’s fifth-largest floating production storage and offloading (FPSO) player, also an established offshore support vessel (OSV), transport and installation (T&I) and oilfield services provider.

We are initiating coverage on Bumi Armada with an “outperform” recommendation, as we believe the group is on track to achieve its growth strategies with its RM21.7 billion firm contract order book which sees earnings visibility up to 2023. Amid the oil price  uncertainty, we are reassured by the group’s ongoing sustainability as any termination in contracts would be subject to a substantial penalty. Our TP of RM1.77 is is based on a discounted cash flow approach with a weighted average cost of capital of 10%, implying a forecast financial year 2015 forward price-earnings ratio of 15.5 times. Considering Bumi Armada’s earnings visibility from long-term contracts secured and plans to annually add on new vessels with secured contracts to provide continuous replenishment of its order book, we deem our valuation reasonable.

Operating on eight FPSO contracts concurrently, coupled with new contracts to be expected annually, Bumi Armada targets to be the fourth-largest FPSO player in the world. The group has moved from small FPSOs (less than US$500 million [RM1.68 billion] capital expenditure [capex]) to large FPSOs (more than US$1 billion capex) reaffirming its growth momentum going forward.

Bumi Armada’s operating FPSOs have met their contractual uptime and are actually performing at 99% uptime (contractual is usually 95%). We understand that some contracts will reward the group with a bonus if more than 95% uptime is maintained. The group’s focus on securing LT FPSO contracts will thus provide stable and recurring cash flows for its offshore business.

As any termination in contracts would be subject to a penalty which could be up to the full value of the contract value at that point. This is furthermore supported by a bank guarantee or a parent guarantee for the total assets. We thus concede Bumi Armada’s business model would continue to be sustainable amid any oil price fluctuations or uncertainties. Even at current oil prices, it is important to identify the differing drilling costs for different location conditions.

The group’s portfolio comprises 56 vessels, of which seven have been earmarked for disposal. Having identified the valuable proposition of the OSV industry, the group has begun to restructure its operations, fleet renewal, towards a higher specification fleet. Currently operating less than 80% of class A of utilisation rate, we are positive the group is taking necessary measures to revive this segment. — PublicInvest Research, Nov 19

This article first appeared in The Edge Financial Daily, on November 20, 2014.