The tale of two FPSO players

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THE recent sharp fall in oil prices has narrowed considerably the value gap between Bumi Armada Bhd and Yinson Holdings Bhd, the fifth and sixth largest floating production, storage and offloading (FPSO) vessel operators respectively in the global oil and gas industry.

At the beginning of the year, long before the market entered choppy waters, Bumi Armada’s market capitalisation, at a share price of RM2.50, was RM14.65 billion while Yinson’s was RM2.26 billion at RM2.19 per share.

As at last Friday, however, Bumi Armada’s shares had shed 53% and closed at RM1.16, shrinking the company’s value to RM6.63 billion. By comparison, Yinson’s shares had gained 24.3% to RM2.67 and its value had risen to RM2.74 billion.

At its latest price, Bumi Armada is valued at 14.86 times its estimated earnings for FY2014 ending Dec 31 while for Yinson, it is 23.24 times its estimated earnings for FY2015 ending Jan 31.

Analysts attribute Bumi Armada’s descent to its relatively high and mature earnings base and credit Yinson’s resilience to its still intact growth potential.

Because it started from a low base, Yinson is expected to see stronger cash flow and earnings over the next two financial years as it reaps the full benefits of existing contracts and new ones that have been secured but have yet to commence.

Speculation that Yinson is soon to ink another huge FPSO contract in West Africa has also bolstered its share price. This is aside from recent news that its 30%-owned unit Yinson Energy Sdn Bhd has received three licences from Petroliam Nasional Bhd (Petronas), which could open up fresh opportunities.

Nevertheless, as Bumi Armada’s shares tumble, investors have begun to view it as oversold. After all, the group did have a strong order book of about RM21.7 billion as at June. Some also believe the hiring of a new CEO to succeed the long-serving Hassan Assad Basma, who suddenly announced his resignation effective Jan 1, 2015, could attract investors and lift the stock.

Perhaps a bigger boost could be a potential mergers and acquisitions (M&A) deal involving Bumi Armada. The Edge Financial Daily last Friday quoted sources as saying that tycoon T Ananda Krishnan is looking to divest his 34.9% stake in the company and that some local oil and gas service companies had been approached for a possible deal.

A source tells The Edge that if the tycoon cannot find a buyer at a satisfying price, and if Bumi Armada’s shares continue to weaken, he would most likely take the group private again, as he did in 2003 when the market was tough.

“Another option for A K is to restructure or merge it with another oil and gas company,” the source adds.

Indeed, Ananda has a penchant for taking his companies private and relisting them later as bigger entities with higher valuations. After delisting Bumi Armada in 2003, he did it to mobile operator Maxis Communications in 2007 (relisted its local business in 2009) and pay-TV operator Astro All Asia Networks in 2010 (relisted in 2012).

After about a decade at the helm of Bumi Armada, Hassan’s resignation during a delicate period for the oil and gas industry has left the company with big shoes to fill. Although Hassan will continue to be engaged as a consultant by Bumi Armada until mid-2016, it will be interesting to see who takes up the challenge as the group’s new CEO in the current low oil price environment.

Bumi Armada started to go downhill in May after it reported a 40% drop in net profit to RM64.8 million in its first quarter ended March 31, 2014. Revenue fell slightly to RM468.9 million from RM488.8 million previously.

The company attributed the reduced earnings to lower utilisation of its offshore support vessels — a segment with an oversupply of assets — as well as slower activity in its transport and installation segment due to winter conditions. The disappointing results were also due to a change in the company’s accounting treatment — changing “operating lease” to “finance lease” — that is said to be a more prudent and conservative method.

This change was sudden, causing speculation that the group might be facing problems at its African operation. However, in a previous interview with The Edge, Hassan explained that the change in accounting treatment was to enable the company to take on larger-scale FPSO projects, which had different requirements.

Bumi Armada has been expanding its fleet in Africa and currently has 11 vessels in Nigeria, 6 in Angola and 5 in Congo.

Meantime, following the plunge in its share price, analysts have seen value emerging in Bumi Armada. According to Bloomberg, the stock has 14 “buy”, 4 “hold” and 2 “sell” calls.  

“Operationally, we like Bumi Armada’s FPSO business model in the light of the current weak or volatile oil market environment. Its contracts are firm with favourable termination clauses and minimal speculative building. Valuation-wise, Bumi Armada is inexpensive. We are not ruling out a potential privatisation of the stock for it is trading at sub-1 times book value,” says Maybank Investment Bank Research in a recent report. It has a target price of RM2.05 on the stock.

At RM1.16, Bumi Armada is valued at a 26% discount to its net asset value per share of RM1.57 as at Nov 30.

Meanwhile, Yinson has been climbing the ladder steadily. In terms of fleet size, it is just two vessels behind Bumi Armada, which has five FPSOs and two under construction while it has four FPSOs and one under construction.

Yinson’s acquisition of Norwegian FPSO player Fred Olsen Production ASA (FOP) for US$165.6 million late last year has served as a game-changer for the company. The acquisition was funded by borrowings and a share placement that brought in high-profile strategic investors — Tan Sri Mokhzani Mahathir and his partner and veteran oil and gas player K C Yeow.

The FOP buy and the entry of Mokhzani and Yeow helped Yinson garner strong investor interest. It spiked to an all-time high of RM3.47 on Sept 15 before surrendering some gains to close at RM2.67 last Friday.

Yinson has an order book of US$3.7 billion (RM12.86 billion), which is expected to last it until 2023. The group, having leveraged FOP’s strong presence in West Africa, is the leading contender for the Offshore Cape Three Points FPSO project off the coast of Ghana.

In FY2014 ended Jan 31, the group’s net profit doubled to RM69.8 million from the year before while revenue nearly breached the RM1 billion mark at RM941.9 million. Its total assets grew to RM2.1 billion from RM800.9 million previously.

According to Bloomberg, consensus has forecast a net profit of RM119 million in FY2015 (its 6MFY2015 net profit as at July 31 had already hit RM61 million) and RM137 million in FY2016, indicating strong growth ahead.

According to theedgemarkets.com, Bumi Armada has a valuation score of 0.6 while Yinson has 1.5. The score provides a composite measure of historical returns and valuation on a scale of 0 to 3, with 3 suggesting that a company gives higher than average market returns and is trading at a lower than average valuation.

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This article first appeared in The Edge Malaysia Weekly, on December 22 - 28, 2014.