Bumi Armada Bhd 
(July 1, RM1.19)
Initiate coverage with outperform and a target price (TP) of RM1.55: Being the world’s fifth-largest floating production, storage and offloading (FPSO) player, Bumi Armada, in our opinion, is worth a second look despite the recent uncertainties in its offshore support vessel (OSV) and transport and installation (T&I) divisions, and the changes in top management.

While we concur that the oil and gas (O&G) industry will be more challenging moving forward, the group’s earnings will be anchored by its sizeable firm order book of RM25.6 billion, mainly underpinned by FPSO jobs.

Beyond 2015, Bumi Armada is poised to stage phenomenal growth with its earnings base forecast to double from RM367.7 million for financial year 2014 (FY14) to RM833.3 million for FY17, when full-year contributions from its FPSOs under conversion kick in. The current valuation looks attractive with price-earnings ratios (PERs) of 14.2 times and eight times respectively, for calendar year 2016 (CY16) and CY17, at a substantial discount to Yinson Holdings Bhd (outperform; TP: RM3.89), its closest local peer.

Bumi Armada mainly builds leases and operates FPSOs in the worldwide offshore market, with six FPSOs in operations currently.  

Complementing its core business, the group also has an in-house T&I division to support FPSO installation and the provision of subsea construction services. It is also one of the largest OSV owners in Malaysia, with 54 OSVs currently in service.

During turbulent times in the O&G industry, order book size matters for players to sustain earnings’ continuity. Bumi Armada possesses RM25.6 billion worth of firm order books, excluding extension options. This is enough to keep the group busy for the next two years, and we opine that it will not be looking to secure any big FPSO jobs in the near term to focus on existing projects instead. 

In addition, its pipeline of FPSOs to be delivered also indicates that the group is slowly breaking into the higher-end FPSO category with higher daily oil production capacity, but still below the threshold of 100,000 barrels per day to avoid over-complexity of projects. This will allow the group to capture a bigger slice of the FPSO market as more deep water field developments may drive demand for larger FPSOs. 

While FY15 would be a year of consolidation for the group as it seeks to rationalise its operations and cut costs, FY16 and FY17 will be when strong growth in earnings kicks in, post commencements of several FPSO charters.

For FY17, maiden full-year contributions from FPSO Kraken, Olembendo, Rainbow and floating storage unit Malta are expected to double the group’s earnings base to RM833.3 million from RM367.7 million for FY14, assuming the conversion of FPSO vessels is completed as scheduled. This is based on the assumption of flattish daily charter rates for its OSV division, with small improvement in vessel utilisation for FY16 and FY17. Further earnings upside could be realised if rates improve further. 

At its latest closing price, the stock is valued at CY16/CY17 forward PERs of 14.2 times and eight times respectively, implying a 30% discount to Yinson, which is smaller in terms of fleet size and has a shorter operational track record, compared with the group. Given the past experience of the group in the FPSO business and a larger scale, we believe Bumi Armada deserves a valuation that is at least on par with its peer.

We issue an “outperform” rating on the stock with a sum-of-parts-derived TP of RM1.55 per share, implying FY16/FY17 estimated PERs of 19.4/10.9 times. We choose to value its FPSO business, employing discounted cash flow methodology to reflect its long-term cash flow-generating ability, while its OSV and T&I businesses are valued at nine times CY16 forward PER, which is conservative given that it is in line with the average smaller O&G peers under the current oil price scenario. Risks to our call include: i) FPSO project execution risk; ii) financing risk and; iii) further severe dip in oil prices. — Kenanga Research, July 1

This article first appeared in The Edge Financial Daily, on July 02, 2015.