Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with a higher sum-of-parts-based fair value of RM0.54/share (from an earlier RM0.42/share), translating to a low FY20F PE of 10x vs. over 20x for the sector.

• Bumi Armada’s shares were sold down yesterday likely on news that independent UK-based exploration and production operator EnQuest, currently with a market cap of £296mil (RM1.6bil), has “proactively down-manned” the Thistle platform on Monday in a precautionary move after a preliminary subsea structural inspection related to a support element on a redundant subsea storage tank. Thistle lies around 201km north-east of Shetland.

• EnQuest’s 115 workers were transferred from the Thistle platform to the nearby Dunlin installation and has announced that the platform will remain shut down pending the conclusion of further inspection and any necessary remedial action.

• EnQuest, which produced 68,548 barrels per day in 1H2019, is expected to generate earnings of US$159mil in FY19F and US$166mil in FY20F, over 2x vs. Bumi Armada. It has interests in multiple oil fields located in the North Sea comprising West Don, Don Southwest, Broom, Heather, Thistle, Deveron, Magnus, Greater Kittiwake Area and Kraken. It also operates the onshore Sullom Voe Oil Terminal, Ninian crude oil pipeline system and Northern Leg gas pipeline.

• Recall that Bumi Armada was awarded a US$1bil floating production, storage and offloading (FPSO) vessel charter in 2012 by Enquest for the Kraken field located in the East Shetland basin, 400km north-east of Aberdeen. The FPSO is a converted Suezmax tanker with a daily production capacity of 80,000 barrels and storage capacity of over 600,000 barrels.

• While first oil for the Armada Kraken FPSO was achieved on 23 June 2017, the vessel has not been able to secure its full contracted charter rate given technical issues which resulted in sub-optimal production levels. Currently, management is unable to provide clarity on Armada Kraken fully achieving Enquest’s contracted production targets.

• As the incident at the Thistle platform is not related to the Kraken field and management views that the worst is over for Armada Kraken’s operational performance, we view the sell-down on Bumi Armada’s shares as overblown.

• Nevertheless, given the group’s still higher gearing, we expect further announcements to monetize the group’s offshore support vessels, given its low overall utilization rate of only 50%, idle construction vessels and up to 40% stake in the fully operational US$1.5bil Armada Olombendo, deployed at Eni’s Block 15/06 off Angola.

• The stock trades at an undeserved FY20F PE of 7x currently against a backdrop of a sustainable earnings recovery and improving balance sheet risks.

Source: AmInvest Research - 23 Oct 2019