Perdana disposal seen as earnings-accretive for Bumi Armada

This article first appeared in The Edge Financial Daily, on September 11, 2019.
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Bumi Armada Bhd
(Sept 10, 28.5 sen)
Reiterate buy with a higher target price (TP) of 34 sen:
Bumi Armada Bhd announced the disposal of floating production storage and offloading (FPSO) Perdana to Century Energy Services Ltd for US$40 million (RM167 million). We are positive on this transaction as Perdana has not been generating revenue since 2017, while incurring depreciation and maintenance costs. Upon conclusion of the deal by end-2019, Bumi Armada will also recognise a US$5 million disposal gain.

Bumi Armada will receive US$5.5 million by end-2019 and another US$5 million within six months of delivery of the FPSO or the field’s first oil, in which the vessel will be redeployed. From the total proceeds, US$11.6 million will be used to settle the amount owed to Century Energy. The remaining US$17.9 million will be paid within two years from the first oil date. It is uncertain at this juncture how much of the total proceeds will be used to pare down debt. However, we estimate Bumi Armada’s net gearing to decline from 2.65 times (as at end-2Q19) to 2.6 times.

We view the Perdana disposal positively as the impact would be earnings-accretive from depreciation and maintenance cost-savings. More importantly, it will also free up initial investment used to fund the equity portion of its new Oil and Natural Gas Corporation Ltd’s FPSO project. Bumi Armada had previously suspended Perdana’s operations due to outstanding amounts owed from bare-boat charter, and operations and maintenance by its client Erin Petroleum Nigeria Ltd since June 2017. Since then, there was only a one-off offload which Bumi Armada negotiated to be partially compensated to offset the loss in revenue.

We raise our financial year 2020 (FY20) to 2021 estimate earnings per share estimates by 3% on savings derived from this disposal. We also raise our TP to 34 sen (from 31 sen) to factor in a lower net debt figure in our sum-of-parts valuation. Bumi Armada’s recent positive news flow (refinanced its debt in May 2019, resolved Kraken power generator issue in the second quarter of FY19, higher offshore marine services utilisation, and the disposal of Perdana) would suggest that the worst is over for the stock. In our view, valuation should continue to rerate, closer to eight times (pre-Kraken impairment in 2018), in line with implied price-to-earnings ratio at our TP. The next catalyst would come from positive outcome of FPSO Claire court case in 4QFY19, and further improvement in FPSO Kraken operation resulting in potential write-backs of impairment. — Affin Hwang Capital, Sept 10