KUALA LUMPUR (May 7): MIDF Research has revised its target price for Bumi Armada Bhd down by 10 sen to 25 sen while maintaining its 'Neutral' recommendation, saying operations will remain challenging despite securing a contract with India’s state-owned oil company Oil and Natural Gas Corporation Limited (ONGC).

In a note today, the research house said while the new floating production, storage and offloading vessel (FPSO) charter contract is expected to contribute positvely to Bumi Armada's earnings, it remains wary of its high gearing ratio at RM10.4 billion as at end-FY18, or 2.7 times.

"This, we opine would continue to suppress its growth going forward. Even with the recently secured refinancing of US$660 million of its debt, we opine that the rate would be higher than the original debt financing rate which was initially at about 4.7- 5.0%."

To recap, Bumi Armada's joint-venture company Shapoorji Pallonji Bumi Armada Godavari Private Limited (SPBAG) had received notification of award from ONGC for the FPSO charter,

The joint-venture entitles Bumi Armada to 30% of the contract value.

The contract is for nine years and is worth approximately US$2.1 billion (RM8.8 billion), which translates to annual revenue of about RM293 million.

However, there is also an option to extend the contract for a futher seven years on an annual basis at an aggregate contract value of around US$655 million (RM2.7 billion), if all extension options are excercised, translating to about RM116 million in revenue per year.

"The contract is also expected to be executed in ONGC’s NELP Block DWN 98/2 Development Cluster-II field which is located off the west coast of Kakinada in India.

"We are maintaining our earnings forecasts for now as the contract win falls within our orderbook replenishment assumption and also pending the upcoming 1QFY19 earnings announcement due by end of this month.

"We are maintaining our Neutral recommendation on Bumi Armada with a revised target price of 25 sen per share (previously 35 sen)," it said.