Good earnings visibility for Bumi Armada

by **Cals** Wed 16 Oct 2013, 13:49

Business & Markets 2013

Written by CIMB Research

Wednesday, 16 October 2013 09:55

Bumi Armada Bhd
(Oct 14, RM3.87)
Maintain outperform at RM3.95 with a revised target price of RM5.17 (from RM5.05): Industry publication Upstream has reported that Bumi Armada is leading its rival in a thrilling two-way race to secure the US$1 billion (RM3.18 billion) Kraken floating, production, storage and offloading (FPSO) contract, the company’s debut bid for a North Sea project. A much-delayed decision is expected this month.

We are cutting our 2013 financial year ending Dec 31 (FY13) earnings per share (EPS) as we had expected the contract to be awarded in June. Our target price rises as we roll it forward. We now value the stock at 22.3 times 2015 calendar year (CY15) price-earnings ratio (PER) (previously 21.8 times CY14 PER), a 40% premium over our target market PER of 15.9 times but still within the historical PER range of oil and gas big caps. A strong FPSO contract pipeline is a rerating catalyst that underpins our “outperform” call.

As for the Kraken project, Bumi Armada’s conversion proposal involving a ready hull and, therefore, a shorter work schedule seems to have swung the competition in the company’s favour. Its competitor, Teekay Corp of Norway, has proposed a newbuild option, which could take about three years to deliver.The winning bidder is expected to be named this month.

We remain positive about Bumi Armada’s odds of winning the Kraken contract, which we have imputed into our forecasts with first contribution to be booked in the fourth quarter of FY13 (4QFY13). We expect the contract to contribute 8% to FY13 net profit and 25% per annum to FY14 and FY15 net profits.

With six FPSO contracts under its belt, Bumi Armada is actively bidding for 11 more, mostly concentrated in Asia,

Africa and South America, in addition to Kraken. Its current order book and extension options are worth RM7.5 billion and RM4.3 billion respectively.

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Stay invested. Bumi Armada’s earnings visibility is good given the long-term nature of FPSO contracts. The primary terms of the existing FPSO contracts will last until 2022 but the extensions could stretch until 2029. — CIMB Research, Oct 14

This article first appeared in The Edge Financial Daily, on October 16, 2013.