Bumi Armada - Sterling C7
Target RM1.50 (Stock Rating: ADD)
Profit contributions from FPSO vessel Armada Sterling II are set to pick up after the C7 marginal field, where the vessel is deployed, hit first oil on 28 Feb, management shared with us at a recent meeting. With this positive development, the FPSO business should continue to anchor the company's performance as the OSV and T&I businesses wade through more challenging times. We continue to value the stock at 15x CY16 P/E, at parity with our target market P/E. We maintain our Add call, with a strong FPSO contract pipeline as a potential re-rating catalyst.
What Happened
We learned from our recent meeting with Bumi Armada's management that India's C7 marginal field, where FPSO vessel Armada Sterling II is working, hit first oil on 28 Feb, signalling the start of production. Profit contributions from Armada Sterling II, which has India's ONGC as its client, began earlier this quarter. Separately, management stressed that funding concerns surrounding its client Afren are not expected to adversely affect Bumi Armada's FPSO contract with the company. Payments from Afren have been on time on a monthly basis. Bumi Armada does not have borrowing on the FPSO vessel - Armada Perkasa - servicing the contract. Armada Perkasa's daily production has been encouraging at 18,000-19,000 barrels. Armada Perkasa and Armada Sterling II are among Bumi Armada's nine FPSO vessels. The company's assets are listed in Figure 1 (FPSO), Figure 2 (OSV) and Figure 3 (T&I).
What We Think
We are encouraged that profit contributions from Armada Sterling II and Armada Perkasa are coming through, thus mitigating the expected weakness at the OSV and T&I businesses. Similar to FY14, the FPSO business is set to be the main driver of Bumi Armada's profits. The OSV business is faced with a more challenging year due to pressure on charter rates. Bumi Armada has a fleet of 54 OSVs, of which five have been earmarked for sale following the sale of six OSVs earlier. Seven new OSVs will be added to the fleet in FY14-15 (Figure 2).
What You Should Do
We advise investors to accumulate the stock. We continue to like Bumi Armada for its solid earnings visibility given the long-term nature of the FPSO contracts (Figure 1) and its good leverage in the international market.