Bumi Armada to gain from lower financial risk, higher oil price

This article first appeared in The Edge Financial Daily, on April 26, 2019.
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Bumi Armada Bhd
(April 25, 24.5 sen)
Upgrade from hold to buy with a higher target price (TP) of 33 sen (previously 20 sen).
Bumi Armada is actively looking to monetise its idle assets at commercially-acceptable pricing to improve its cash flows. Subsequent to the refinancing, we reduce the financial years of 2019 and 2020 (FY19-FY20) earnings by 17% and 16% respectively, factoring additional interest cost. Nonetheless, we upgrade the stock to “buy” with a higher TP given the alleviation of financial risk coupled with recovering oil price.

Bumi Armada announced that its wholly-owned subsidiaries, Bumi Armada Capital Offshore Ltd (Bacol) and Bumi Armada Holdings Labuan Ltd (BAHLL), have secured refinancing of the aggregate principal amounts outstanding under Bacol’s existing term loan facilities of US$380 million and BAHLL’s revolving credit facilities of US$280 million under a US$660 million term loan facilities. The facility comprises tranche 1 of US$260 million and tranche 2 of US$400 million repayable over 24 months and 60 months respectively.

We are positive on the news as it alleviates the near-term financial risk and reduces going concern risk. As the deadline of the new facility is being postponed, Bumi Armada is likely to incur additional interest cost of about RM40 million per annum.

Bumi Armada is actively looking to monetise its assets — certain idle offshore marine services and floating production and operation assets — at commercially-acceptable pricing. With that, this will help to improve its near-term cash flows and will be used to repay the loan.

Note that the RM1.8 billion term loan related to Armada Kraken is still classified in current liabilities due to its inability to achieve final acceptance by the scheduled date earlier on. The project lenders have the right to issue, but have to-date, not issued a notice for full prepayment of the loan. We understand that Bumi Armada is still in discussion with clients and is expected to resolve the matter in the near term.

According to Upstream, Bumi Armada is the only bidder for India’s Oil & Natural Gas Corp Ltd’s floating production stage and offloading vessel contract for the KG-DWN-98/2 project. The contract is likely to have firm nine-year duration with an option to extend by up to six years. Looking at the current financial situation, we do not discount the possibility of potential cash call if Bumi Armada were to secure the job.

We reduced our FY19-FY20 earnings by 17% and 16% respectively after factoring additional interest cost subsequent to the refinancing. Despite the earnings cut, our sum-of-parts-derived (SoP) TP is lifted to 33 sen (from 20 sen) after we remove the 40% discount to discounted cash flow-valuation from our SoP. With near-term financial risk alleviated coupled with recovering oil price, we expect sentiment on the stock to turn positive. Our revised TP has an implied FY19 price-to-earnings ratio of 8.2 times and FY19 price-to-book value of 0.5 times, which is slightly above -1 standard deviation of its three-year mean. Downside risk to our call would be earnings disappointment arising from Kraken operations. — Hong Leong Investment Bank Research, April 25