Bumi Armada - Cluster-7 FPSO in the bag BUY

- We maintain our BUY call on Bumi Armada, with an unchanged sum-of-parts-based fair value of RM4.65/share, which implies an FY13F PE of 24x. 

- Bumi Armada's 50:50 joint-venture with Shapoorji Pallonji and Company Limited (SPCL) of India has been awarded a charter contract potentially worth RM3.3bil (US$1.1bil) to provide a floating, production, storage and offloading (FPSO) vessel for India's Oil and Natural Gas Corporation Limited's Cluster-7 field, located offshore in the west coast of Mumbai. The charter will be operated by SP Armada, the JV set up by Bumi Armada and SPCL. 

- The FPSO's fixed contract, valued at US$740mil, encompasses a fixed period of 9 years, while ONGC has an option to extend the contract for an additional 7 years on an annual basis at a total value of US$340mil.

- This FPSO contract is expected to have a project IRR of 12%, while the JV will have a debt:equity ratio of up to 80% (still being negotiated with the banks). Based on the assumption that the option extension will be fully exercised until the 16^th  year, we estimate this contract to have an NPV accretion of RM200mil and incremental earnings of RM63mil, or 10% of FY14F earnings.  

- But we are neutral on this award, which was deferred from last year, as it is within expectations. Upstream had earlier reported that Bumi Armada had outbid the only other contender, M3nergy, in this tender. 

- We note that consensus, based on management's internal target and in line with our estimates, is projecting that Bumi Armada will be awarded two FPSO contracts annually. However, the group failed to secure any new FPSO charter last year due to project delays and retendering exercises. 

- We maintain our FY13F-FY14F earnings on expectations that the group will be able to secure an additional FPSO charter later this year against the backdrop of more such projects being tendered or negotiated.

- Besides ONGC’s Cluster 7 marginal field in India, we understand that the group is also bidding for 3 more projects – Indonesia’s Madura field, Afren’s Okoro block off Nigeria and ENI’s OML field of Nigeria. We estimate that the group’s order book has risen by 12% to RM12.5bil (including optional extensions worth RM3.7bil), which represents a healthy 4.8x FY13F revenue.

- The stock currently trades at an attractive FY13F PE of 19x compared with SapuraCrest Petroleum’s peak of 29x in 2007.  

Source: AmeSecurities