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Saturday, November 29, 2014

Bumi Armada: A good long-term bet?


Despite a RM31-billion order book and good long-term prospects, Bumi Armada’s share price has been plummeting in past months. Is it caused by a coming rights issue? Could this week’s delayed results announcement halt the slide?  
Business model: Bumi Armada is a Malaysian oil & gas company providing international offshore oilfield services in 12 countries covering Asia, Africa and Latin America.
It was incorporated in 1995 and listed on Bursa Malaysia in 2011. Bumi Armada has over 45 vessels and is the fifth largest FPSO (floating production storage and offloading) operator in the world and among the top three OSV (offshore support vessels) players in Southeast Asia.
bumi-armada-logoCurrently its core business is the building and chartering of FPSOs, vessels equipped with hydrocarbon processing facilities that can either be new builds or converted vessels. Raw oil is processed and stored on the FPSO and subsequently distributed via pipelines and tankers. A FPSO can cost between US$400mil and US$3bil to manufacture, depending on the size and complexity of the vessel.
Other than FPSOs, it is also venturing into deep water gas fields with FSRUs (floating, storage and regasification units) that are enhancements of its FLNGs (floating liquefied natural gas) vessels.
Bumi Armada is also involved in transport & installation (T&I) and oil field services (OFS). It also has three support units – asset and management operations (AMO), major projects (MP) and engineering & technology (E&T).
Shareholders and management: The company is linked to Malaysian tycoon Ananda Krishnan. Since 2005, Bumi Armada has been led by its CEO (chief executive officer) and executive director Hassan Assad Basma, a Dutch national with over 30 years of experience in the oil & gas industry around the world including Middle East, India, Southeast Asia and Australia.
Bumi Armada price chart 1 year 150814Share performance: Although the company has secured two big FPSO projects in Kraken (US$1.4 billion) and Eni Angola (US$2.9 billion), Bumi Armada has plunged by more than 18% year-to-date (ytd).
Last Friday, Bumi Armada’s share price closed trading at RM3.35, up 8 sen.
Last week, company was supposed to announce its financial results for the second quarter ended June 30 2014 (2Q14) but cancelled it at the last minute due to some new developments. It will reschedule the announcement this week.
The company is planning a RM2.2 billion bonus and rights issue to fund expansion.
The bonus and rights issue, once approved by shareholders, would award shareholders one bonus share for every two shares owned as well as one new rights share for every two shares owned (not including bonus shares).
The capital raising exercise would enable the company to reduce leverage ratios, creating additional headroom for borrowing ahead of anticipated large projects awards and expansion. The bulk of the funds is expected for the large capex (capital expenditures) of new FPSOs.
Analyst Calls on Bumi Armada 150814What analysts think: Analysts are generally still positive about Bumi Armada despite the underwhelming share price. Reports by UOB Kay Hian (UOBKH) and Alliance DBS still recommend to buy Bumi Armada’s shares with target prices of RM4.00 and RM4.20 respectively.
UOBKH feels that Bumi Armada’s sliding share price could be attributed to the uncertainties over the rights issue as well as concerns over simultaneous executions of the two key contracts in Kraken and Angola.
“Underperformance in its share price could be due to two key reasons. The  share overhang as some of the major shareholders look to pare down their stake as they are not keen to participate in the rights issue. The other being concerns over the higher execution risk involved as Bumi executes two major contracts concurrently,” said UOBKH.
Nevertheless, the analysts still back Bumi Armada based on its solid earnings up to 2030 backed by a RM31 billion order book, its long-term partnership with Keppel Shipyard and attractive valuation of 16.4x 2015 F PE (price earnings).
Earnings forecast for Bumi Armada 150814Earnings forecast: Both Alliance DBS and OBKH have lowered Bumi Armada’s earnings estimates due to its revenue recognition method.
“Bumi’s earnings would be back-end loaded to 2016F (financial year) once it delivers its FPSOs (FPSO Kraken and FPSO Armada Ali). We lower our 2014F/2015F/2016F earnings by 15.2%/7.1%/5.4% respectively as we tweak our forecasts to account for the changes,” said UOBKH.
For the financial year 2013, it posted net profit after tax of RM431 million on RM2 billion revenue. Currently, Bumi Armada’s has an order book of RM31 billion and is bidding for new tenders in Indonesia, Brazil, Nigeria and Mexico. Out of its current orderbook, 84% of the company’s business is in the FPSO segment, 9% OSV and  7% T&I.
StockStalk: Although Bumi Armada’s share price has dropped in recent months, most analysts feel that Bumi Armada is still a good long-term bet, with its huge order book and strong fleet of vessels with deep water capabilities.
According to a recent MIDF Research sector update on the oil & gas industry, approximately 70% of hydrocarbon discoveries in the last two years are from deep water fields and therefore Bumi Armada’s FPSO business should benefit from the continuing demand for deep water vessels in the near future.
Nevertheless, investors might still be concerned about a rights issue overhang with major shareholders paring down their shareholding. Investors could also be holding off until this week’s delayed 2Q14 results (and possibly a new announcement) before buying in.
These developments, along with concerns over its simultaneous executions of projects in Kraken and Angola, would be important to watch and consider for investors looking at this counter as a way to tap into the oil and gas sector.
Once these uncertainties and worries are cleared up, however, it would be interesting to see if there would be a rebound — and how high if so — in Bumi Armada’s share price given its apparently solid fundamentals against positive sector outlook going forward, especially if the developments swing the company’s way.
Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.

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