Bumi Armada - A Krak-er of a deal

Target RM5.23 (Stock Rating: ADD)

Bumi Armada has finally closed the Kraken deal, its biggest and potentially longest FPSO contract ever. The 8-year US$1.4bn charter takes its order book to a record high. It comes with 17 annual extension options worth US$924m that could keep the company busy until 2038. The contract value is within our estimate. However, given the delay in its award, we lower our FY13 EPS forecast as we now expect its first meaningful contribution to be booked in 1Q14 instead of 4Q13. We continue to value the stock at 22.5x CY15 P/E, a 40% premium over our implied market target of 16.1x, but still within the historical P/E range of the O&G big caps. A strong FPSO contract pipeline is a catalyst for our Add call.

The contract value is within our estimate. However, given the delay in its award, we lower our FY13 EPS forecast as we now expect its first meaningful contribution to be booked in 1Q14 instead of 4Q13. We continue to value the stock at 22.5x CY15 P/E, a 40% premium over our implied market target of 16.1x, but still within the historical P/E range of the O&G big caps. A strong FPSO contract pipeline is a catalyst for our Add call. 

What Happened 

Bumi Armada has finalised a contract with Enquest in relation to the supply of a floating production, storage and offloading (FPSO) vessel at the latter's Kraken field in the North Sea. The estimated contract value is US$1.4bn for the initial charter period of eight years, with a further contract value of US$924m if the 17 annual extension options are fully exercised. 

What We Think 

Though there was a delay in the finalisation of the contract since the 17 Nov letter of interim agreement, we are nevertheless thrilled that Bumi Armada has finally sealed the deal. Kraken is Bumi Armada's seventh FPSO order and its biggest ever. At US$1.4bn, the contract doubles the average value of an FPSO contract in Asia. Furthermore, spanning up to 25 years including the extension options, the contract could be the company's longest, further solidifying its already firm earnings visibility. Bumi Armada's order book is now at a record RM13.7bn, driven by the FPSO segment (73%), followed by transport & installation (14%) and offshore support vessels (OSV) (13%). Its extension options are worth RM9.1bn, also a new high, with contributions from FPSOs (68%) and OSVs (32%). We expect Kraken to contribute 25% p.a. to FY14-15 net profits. In view of the bigger earnings base, we raise our FY14-15 DPS from 3 sen to 4 sen. 

What You Should Do 

Accumulate the stock and ride the contributions from Bumi Armada's expanding FPSO fleet. The company is now actively bidding for around 12 FPSO contracts around the world.

Source: CIMB Daybreak - 26 December 2013, Full PDF Report