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Saturday, November 29, 2014

Bumi Armada: A long way to a rebound


Most analysts appear upbeat on Bumi Armada Bhd (BAB), which recently reported its third quarter 2014 (3Q2014) results and are optimistic that falling oil prices will not hurt the company’s floating production storage and offloading (FPSO) business. Yet the company’s share price continues to fall. Will things pick up eventually for the stock?
Business model: Most people know BAB as a Malaysian company providing international offshore oilfield services across Asia, Africa and Latin America. It was founded in 1995 and listed on Bursa Malaysia in 2011. The company has more than 45 vessels and is the fifth largest FPSO operator in the world. It is also among the top three offshore support vessels (OSV) players in Southeast Asia.
Not much has changed since our previous StockStalk on the company. It did make headlines however, when it recently announced that its RM3.8 billion FPSO contract with Indonesia’s Husky-CNOOC Madura Ltd (HCML) was delayed for the second time. The company announced to Bursa Malaysia on November 13th that it had for postponed the execution date for the contract for the second time.
The FPSO contract was first announced in mid-August when it received the letter of intent from HCML. “The LOI period has been extended to 27th November 2014 and we expect to finalise the contract within this time,” the company told KiniBiz via email.
Commenting on the effect of falling oil prices on Bumi Armada’s business, the company noted that while oil prices have generally been relatively volatile, the impact is very much dependent on the long term direction of oil prices.
“If the current weakness is short term in nature, then the impact will be relatively minimal to the industry. If however, the medium term is for prices to weaken or remain low, then it will impact the industry as oil companies review their investment patterns. As a company, BAB has a large order book of committed contracts with clients and especially with the FPSOs, has strong contracted earnings’ visibility going forward,” Bumi Armada said.
Shareholders and management:  Bumi Armada has strong ties to tycoon Ananda Krishnan. It has been helmed by Dutch national Hassan Assad Basma, its chief executive officer and executive director since 2005. As of November 21, the company’s major shareholders are Ananda Krishnan’s Usaha Tegas (34.9%), the Employees Provident Fund (8.7%) and Ombak Damai Sdn Bhd (7.1%).
Bumi Armada Bhd 1-year price chartShare performance: Bumi Armada’s share price has got a walloping so far, giving a one-year return of -44.23% as of last Friday according to data from Bloomberg. Its 52-week trading range was between RM1.34 and RM2.52 as of last Friday, with Reuters giving it a beta coefficient of 1.27. A beta coefficient of more than 1 means that Bumi Armada is trading at a higher volatility than market average.
What analysts think:  Despite the current state of oil prices and its share price performance, analysts tracked by KiniBiz are generally upbeat on the stock. Among its supporters are MIDF Research, which maintained its ‘buy’ call on the stock as of November 21, despite the company’s lower 3Q net profits. MIDF said it in a report last Friday that it was maintaining its recommendation “premised on expanding topline, increasing in quality orderbook value coupled with sizeable extension options, sustainable profit margin and undemanding valuation”.
Bumi Armada Bhd analyst CallsUOBKayHian, which also has a ‘buy’ recommendation on the stock, was more cautious. In a report last Friday it said that despite the company’s OSV fleet rationalisation programme to dispose of unprofitable vessels and replacing them with newer vessels, it was cautious on an overall oversupply situation in the OSV segment.
Risks to its call, said UOBKayHian, include Bumi Armada’s inability to clinch new contracts in the medium term and unexpected cost overruns resulting in lower profitability. However, it still likes Bumi Armada in the current low oil price environment as its long-term FPSO charter contracts are locked in during the firm period of a charter contract.
RHB Research in a report last Friday, downgraded Bumi Armada from a ‘buy’ to a ‘neutral’, due to Bumi Armada’s disappointing 9 months of 2014 numbers. “With only an 8% upside to our TP (target price), we downgrade Bumi Armada to ‘neutral’, as the company will only start to register meaningful earnings in FY16,” it said.
Earnings Forecast:
Bumi Armada earnings forecast
StockStalk: We are somewhat concerned about Bumi Armada’s persistently spiraling share price and the oversupply situation in the OSV segment. According to UOBKayHian 9% of the company’s firm contracts are from this segment, while 6% are from transport and installation and 85% from the FPSO segments respectively.
Despite its ‘buy’ rating on the stock, Maybank IB Research remained relatively realistic on the share price performance. “We reckon most of the negatives on the stock have been priced in but acknowledge that confidence may take a longer period to recover,” it said in a November 21st report.
Commenting on the company’s share price downtrend and what measures Bumi Armada are taking to restore investor confidence in the stock, Bumi Armada said: “The company has always actively engaged with equity analysts and investors to consistently provide the latest updates to our projects and tenders as well as the corporate updates, and we will continue to do so going forward.
“Although we believe most of the correction has been related to the recent downturn on crude (oil) prices, we will continue to provide the latest updates to our projects when we are allowed to publicly disclose the information.”
We think that Bumi Armada’s share price will remain depressed as long as investor confidence stays shaky concerning oil prices. The falling oil prices are truly testing investors’ patience it seems, and those already invested in the stock would be wise to hold their positions until oil prices return to a more ‘normal’ level. New investors may find this a good time to buy cheaply into the stock, however they too should exercise patience as analysts expect meaningful earnings to come only in FY2016.
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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