Market expectations for Bumi Armada too high

Bumi Armada Bhd (Aug 9, RM3.77)
Downgrade to fully valued with a target price of RM3.35: Delays in floating, production, storage and offloading (FPSO) contract awards globally have taken their toll on Bumi Armada as the FPSO segment remains its key growth driver (about 50% earnings contribution).

Outstanding FPSO bids include Belud (Malaysia) and C7 (India), which may be awarded by September this year. But we do not discount delays which have been common at all the oil majors.

The company is re-tendering for the Madura (Indonesia) project and should be submitting its bid by the end of this month. Its offshore support vessel (OSV) and transport and installation (T&I) businesses remain strong, although oilfield services (OFS) has suffered due to slow contract flows in Malaysia.

Despite Petroliam Nasional Bhd’s committed record high capital expenditure in Malaysia for the next few years, contract flow has been slower than expected. Among its outstanding tenders in Malaysia are two marginal fields (with two different foreign partners), one FPSO contract (Belud), and two enhanced oil recovery (EOR) projects (Angsi and St Joseph).

These projects may only take off in the financial year ending Dec 31, 2013 (FY13) given the numerous delays which have affected its growth prospects. We cut forecast FY12 to FY14 earnings by 7% to 9%, mainly after removing the FPSO contract win in FY12 and reducing contribution from OFS.

Consequently, our target price is nudged down to RM3.35, pegged to 18 times FY13 earnings per share. We believe the new FPSO contracts have been priced in, and consensus estimates may be cut by about 18% (FY12) and 21% (FY13) given zero FPSO wins since its last in September last year.

We now assume one new FPSO win each for FY13 and FY14 which account for 10% and 9% of earnings. — HwangDBS Vickers Research, Aug 9

This article appeared in The Edge Financial Daily on August 10, 2012.