This article first appeared in The Edge Financial Daily on April 30, 2018 - May 6, 2018
Bumi Armada Bhd
(April 27, 83.5 sen)
Maintain buy with a fair value (FV) of RM1.22: Our “buy” recommendation is maintained on Bumi Armada Bhd with unchanged forecasts and a fair value of RM1.22 per share, which implies a financial year 2019 forecast (FY19F) price-earnings (PE) of 16 times.
Even though Bumi Armada’s share price has retreated 9% since the recent announcement of a shutdown of its wholly-owned floating production, storage and offloading (FPSO) vessel Armada Perdana off Nigeria, we continue to view the risk profile of the group as substantively improved with its clientele’s upcoming full acceptances of the FPSO vessels Olombendo and Kraken, supported by minimal fourth quarter of FY17 (4QFY17) impairment charges.
Additionally, Upstream revealed that Bumi Armada has emerged as the unexpected front-runner to land the FPSO charter for Eni’s Zabazaba project off Nigeria in OPL 245. A formal contract award is far from being concluded due to ongoing wrangles over local content and pricing, while the OPL 245 is also at the heart of investigations into alleged corrupt practices by Eni and partner Shell.
Earlier, the bid for Zabazaba’s 150,000 barrels per day (bpd) FPSO was only between Bumi and a group comprising Bluewater Offshore and Saipem. In early November last year, Upstream reported that Bluewater-Saipem had the edge with the lowest bid of US$5.4 billion (RM21.16 billion) versus Bumi Armada’s US$7.6 billion.
However, negotiations over local content, which requires fabrication of 50% of FPSO modules in Nigeria and full local integration of the topsides, have brought into question Bluewater-Saipem’s pole position.
Zabazaba’s FPSO would be a converted very large crude carrier that, in addition to oil, will handle 200 million cu ft per day of gas, 240,000 bpd of injected water and would be able to store 1.7 million barrels of crude. First oil is likely to flow in late 2021, rather than Eni’s original 2020 target.
Assuming that capital expenditure for the FPSO is similar to Olombendo’s US$1.5 billion in Angola, with a project internal rate of return of 11%, we estimate that Bumi Armada’s sum-of-parts could be raised by 11 sen or 10% to RM1.34 per share, if the charter was successfully secured.
This is a positive development which reaffirms our view that rising opportunities in floating solutions in Latin America, the Gulf of Mexico and Africa offer rerating catalysts, against the backdrop of a few remaining service providers still able to make a bid following the severe oil price slump from 2015 to 2017.
The stock currently trades at a compelling FY18F PE of 11 times versus the sector’s 20 times with near-term earnings recovery on the horizon. — AmInvestment Bank, April 27