We  continue  seeing  4%/12%  FY15/FY16  EPS  growth  respectively.Maintain  BUY  with  a  new  FV  of  MYR2.24  (vs  MYR2.59  ex-all),  a  24%upside. We revisit our earnings forecasts after management updated us on  its  rights  issue  and  business  outlook.  We  raise  our  FY14  EPS forecast by 5% on the good progress of its pipe-laying contract,  but cut our  FY15  estimate  by  25%,  on  lower  earnings  recognition  for  new FPSOs under conversion.

Management  update.  We  recently  met  with  management  to  get  an update on Bumi Armada’s rights issue and business outlook. We believe investors should look past the last two weak quarters and look forward to growth over the  next 18-24  months. This is when management expects three  floating  production,  storage  and  offloading  (FPSO)  units,  ieArmada Sterling 2, Armada 15/06 Angola and Armada Madura BD, to hit first  oil.  We  note  the  Lukoil  (LKOD  LI,  NR)  pipe-laying  contract  in  the Caspian Sea is also proceeding well.

Rights issue  details.  Bumi Armada’s ongoing 1 -for-2 rights issue of up to  1.5bn  new  shares  is  expected  to  raise  MYR2.0bn.  In  addition,  the company is also undertaking a 1-for-2 bonus issue. The cash raised from the rights issue will be utilised for the following capex: i) MYR1.4bn for at least  one  FPSO  vessel,  ii)  MYR80m  for  the  purchase  of  two  new deepwater capable vessels, iii) MYR200m for at least two  new subsea umbilicals, risers and flowlines (SURF) vessels, and iv) MYR80m  for the purchase  of  subsea  well  intervention  equipment  for  enhanced  oil recovery (EOR) activities. 

Maintain  BUY  with  a  fully-diluted  FV  of  MYR2.24.  Following management’s  update, we have  revisited our earnings  forecasts, taking into  account  lower  earnings  recognition  from  the  new  FPSOs  in  their conversion  years.  We  have  also  revised  our  earnings  assumptions  for the  transportation  and installation  (T&I)  segment. Overall,  we  have  cut our FY15 EPS estimate by 25% and continue to expect FY15/FY16 EPS to  grow  by  4%/12%  respectively.  This  is  driven  by  T&I  works  in  the Caspian  Sea  and  contribution  from  producing  FPSOs.  With  our  new forecasts,  we  estimate  a  new  fully-diluted  SOP  FV  of  MYR2.24  (from MYR2.59  ex-all).  We  reiterate  our  positive  view  on  floating  production systems  and  believe  that  Bumi  Armada  is  in  a  good  position  to  take advantage of the continuous demand for FPSOs.

Utilisation of cash from  the  rights issue.  Management expects the rights issue  to raise MYR2.0bn cash,  which will be utilised to strengthen the company’s capability in four business segments.

Balance sheet holding up for now. As of the  latest quarter, Bumi Armada has  total borrowings  of MYR4.7bn, of which 70% is long  term  and 30% short  term, while its cash position stands at MYR803m, giving it a net gearing of 0.89x. With the expected cash infusion of MYR2.0bn from the corporate exercise, Bumi Armada’s  net gearing will improve   to 0.22x,  which will leave room for the company to take on new debt if needed.  Management  expects  capex  over  the  next  two  years  at  MYR6.0bn,  which will be funded by a combination of cash  flow from operations, cash in hand, upfront contract payments,  cash from  the rights issue as well as new debt. Historically wi th FPSO projects, capex would  be 25% funded by equity and 75% by debt. With this in mind,  we  believe  Bumi  Armada  will  not  have  any  problems  financing  its  FPSO projects should it win any of the five outstanding bids.  Management also mentioned that it is not looking to raise any more equity funding over the next two years. Bidding for more FPSO projects.  Bumi Armada’s management mentioned that it isnow  looking  at  FPSO  projects  that  require  capex  of  USD1bn-1.5bn  (MYR3.2bn-4.8bn), and it is  no longer looking at smaller-scale FPSO projects. Although its  most recent contract win is to supply an FPSO to the Madura BD field with a small- to midsized  FPSO –  requiring capex of  USD400m  –  the contract award has been  delayed since  2013.  Currently, Bumi Armada has  five  outstanding FPSO bids; one in Brazil and four in South America and the company is confident of securing at least one new award. Note that for vessels which require more than USD700m capex, the asset will be  under  a  finance  lease  –  this  means  that  the  company  will  book  in  minimal earnings at the start  of the contract and during the vessel conversion period,  while the bulk of the earnings will only come in later  when the asset is operational.

FLNG  the  next  frontier.  Bumi  Armada’s  management  mentioned  that  in  the  next three  to five  years,  it  would be  looking  to  own a floating  liquid natural  gas (FLNG) vessel.  It  is  watching  closely the  development  of the  Prelude  FLNG built  by  Royal Dutch  Shell  (RDSA  LN,  NR),  which  will  be  deployed  offshore  Australia.  Note  that Prelude’s  original cost was USD3.5bn but ballooned to USD12bn due to technical as well as  engineering problems that were  specific to a  FLNG  vessel. By comparison, the  first  FPSO  ever  built  also  suffered  from  cost  overrun s  due  to  the  steep engineering  learning  curve,  although  the  cost  now  has  come  down  to  a  more attractive  investment  level.  For  more  details  on  FLNG,  please  refer  to  our  7  Augreport: Gas Field Development The Next Frontier.

Expanding offshore support vessel (OSV) capabilities. Bumi Armada is looking to dispose  of  smaller  OSV  vessels  as  part  of  its  fleet  rejuvenation  exercise.  Thecompany is looking to  dispose  of  six  more  vessels  this  year  but  note  that it  is  not desperate to sell and would not want to sell at a discount. Bumi Armada is looking to acquire  two  more  multi-purpose  supply  vessels  (MPSV)  which  are  deepwatercapable and would be looking for work in either Malaysia or West Africa deep waters. As a result, the OSV fleet will expand to 60 vessels. The company will also be lookingto utilise its OSVs to comple ment the current FPSO operations.

SURF  to  boost  T&I  segment.    The  company  will  use  MYR200m  raised  from  the rights  issue  to  acquire  at  least  two  SURF  vessels,  which  will  complement  Bumi Armada’s  FPSO  operations.  It  will  use  SURF  vessels  to  install  subsea  cables  to connect  surface  installations  (platforms,  FPSOs)  with  subsea  developments.  The cables will transmit power and data, as well as hydraulic and other fluids.

Umbilicals: Umbilicals  are cables which are able to transmit power, data as well as  hydraulic  or  other  fluids  for  oil  extraction  purposes.  The  umbilicals  will  be connected  from  a  platform  or  an  FPSO  to  a  wellhead,  pump  or  valve  on  the seabed. There are several purposes for umbilicals; hydraulic umbilicals are used to  activate  wells,  chemical  umbilicals  pump  chemicals  into  the  production stream, electrical umbilicals connect to a subsea control system and will be able to transmit electricity as well as information on the temperature, pressure, and the integrity of the subsea installation. 

Risers/flowlines:  Risers  or  flowlines  are  also  connected  from  a  platform  or  a floating  vessel  to  a  subsea  development  installation.  Risers  are  much  less complicated  than  umbilicals,  and  are  mainly  used  to  transport  produced hydrocarbons, as well as production materials to a wellhead.

EOR  equipment  to  kick  start  oilfield  services.  Bumi  Armada  will  be  utilising approximately MYR80m to purchase EOR offshore equipment, which will be under its oilfield  services  segment.  There  are  several  methods  for  EOR,  namely  thermal recovery,  chemical  injection,  gas  injection  and  water  injection.  EOR  works  by changing the  physical and chemical  property  of  the  trapped  hydrocarbon to  further extract oil or gas which could not have been possible using conventional extraction method. We are positive on this development and believe EOR will be the main focus of oil  & gas majors around the world as an extraction method as they try to  addressdecreasing production from mature fields

Earnings  outlook.  After our meeting with management, we received more clarity on how Bumi Armada books in earnings, especially for the bigger FPSO projects. During vessel  conversion  years,  the  company  will  only  book  in  minimal  earnings  into  its books to be more in line with risk, as the  risk of not completing the project decreases as the project passes a certain stage of completion. Once  the vessel is completed and  deployed,  Bumi  Armada  would  start  booking  in  the  daily  charter  rate  of  the vessels into revenue. We believe the bulk of Bumi Armada’s earnings for its  FPSOswill  start to materialise  in  late-FY15/FY16 as  all vessels currently under conversion would be deployed and produce their first oil then.  We estimate the FPSO segment earnings would grow by 34%/77% in FY15/FY16 respectively.

For its OSV segment, we estimate earnings in FY15 to grow by 15%,  driven by the delivery of two new MPSV, while growth in FY16 will be slightly muted at 4% y-o-y as Bumi Armada winds down its fleet rejuvenation programme. For  its  T&I  segment,  we  expect  12%  growth  in  FY15,  as  the  Engineering, Procurement,  Construction  and  Commissioning  (EPCC)  as  well  as  the  pipe-laying contracts  go  into full swing,  but  earnings in FY16 could take a hit as  management expects  both  contracts  to  be  completed  by  end  4QFY15.  However,  Bumi  Armada believes  it  could be receiving more contracts for work  in the  Caspian Sea region as the  exploration and  production  expertise  there  is still under-developed. Note that we have  not  imputed  any  new  awards  for  its  T&I  and  OFS  segment,  and  we  believe potential earnings upside in FY15/FY16 would come from these two divisions.

Maintain  BUY  with  a  fully-diluted  SOP  FV  of  MYR2.24.  We  revisited  our FY14/FY15  earnings  forecasts  after  accounting  for  the  lower  earnings  recognition from new FPSOs in their vessel conversion years. We have also revised our earnings assumptions for the T&I segment. Overall, we raise our FY14 EPS estimate by 5% as we tweak our assumptions for the Lukoil pipe-laying contract in the Caspian Sea,  but we cut our FY15F forecast by 20% as we adjust  for the minimal earnings booked in during  conversion  years  for  the  new  FPSOs.  Nevertheless,  we  continue  to  expect FY15/FY16  EPS growth of 4%/12%  respectively, driven by T&I works in the Caspian Sea  as well as producing FPSOs.  With our new forecasts, we estimate a  new fullydiluted SOP  FV of MYR2.24  (from MYR2.59 ex-all previously). We advise investors to subscribe to the rights issue as the proceeds will be utilised to propel the growth of Bumi  Armada  going  forward.  We  also  reiterate  our  positive  view  on  floating production  systems  and  believe  that  Bumi  Armada  is  in  a  good  position  to  take advantage of the continuous demand for FPSOs. 

Source: RHB