This article first appeared in The Edge Financial Daily on May 8, 2019
Bumi Armada Bhd
(May 7, 21.5 sen)
Maintain hold with an unchanged fair value (FV) of 20 sen: We maintained our “hold” recommendation on Bumi Armada Bhd with unchanged forecasts and FV of 20 sen per share, based on a 30% discount to our sum-of-parts (SoP) of 33 sen per share given the possibility of a highly dilutive equity raising against a heavily geared balance sheet.
As indicated in our earlier reports, the group’s 30:70 joint venture (JV) with India’s Shapoorji Pallonji Oil & Gas has secured a time charter for a floating production, storage and offloading (FPSO) vessel charter from Oil and Natural Gas Corp Ltd (ONGC) for the ONGC NELP Block KG-DWN 98/2 Development Project Cluster-II field on the east coast of Kakinada, offshore India.
However, the JV will be converting a tanker identified by Shapoorji, without involving Bumi Armada’s idle FPSOs or vessels. The contract’s value is US$2.1 billion (RM8.8 billion) for a fixed nine years with options for seven annual renewals, carrying an aggregate US$655 million (RM2.7 billion).
Assuming a capital expenditure of US$1.3 billion — slightly lower than for the Armada Olombendo FPSO — a project internal rate of return (IRR) of 11% and a weighted average cost of capital of 7%, we estimate a 30% stake could substantively raise the group’s SoP by 17% and the financial year ending 2021 forecasts (FY21F) net profit by 9%.
Notwithstanding the management’s earlier claims that financing will not be needed for this project, we estimate a debt-to-equity financing ratio of 80:20 will mean the group will need to raise additional equity financing of RM322 million, which may be uncertain given Bumi Armada had recently refinanced US$660 million of unsecured term loan and revolving credit facilities.
Additionally, the group still has to renegotiate with its lenders for RM3.1 billion sukuk and unsecured term loans as Bumi Armada had breached their net debt or earnings before interest, taxes, depreciation and amortisation (Ebitda) convenant terms.
The likelihood of a dilution from an equity raising remains elevated given Bumi Armada’s high FY19F net debt or Ebitda of 9.1 times versus Yinson Holdings Bhd’s 2.9 times. Hence, the group intends to dispose of idle assets and minority stakes in operating FPSOs such as the US$1.5 billion Armada Olombendo, currently fully operational.
We estimate a 40% stake sale in the Armada Olombendo could secure US$275 million (RM1.1 billion) in cash, assuming a project IRR of 11%. However, it will only cut Bumi Armada’s net debt or Ebitda to 7.9 times, still elevated against its peers. Hence, the stock trades at a depressed FY19F price-earnings of five times against still-elevated balance sheet risks. — AmInvestment Bank, May 7.