Mistry boost for Bumi Armada


A shot of Bumi Armada Bhd’s Armada Firman 2 at the Drydocks World Shipyard in Tuas, Singapore

WHILE it is generally business as usual for shipping giant Bumi Armada Bhd, two developments have taken place recently that make the stock an interesting counter to watch.

The first is the significant selldown of its shares due largely to poor sentiments associated with oil and gas (O&G) services providers due to the falling crude oil price.

Over a period of about seven weeks, as much as RM3.35bil was wiped out of its market capitalisation. At Friday’s close, Bumi Armada’s shares were trading at RM1.34, down by some 46.2% from its year-to-date high of RM2.49 recorded early this year.

True, Bumi Armada can be considered one of the victims of the oil price drop, but with an order book of RM21.7bil, analysts say the company will likely weather the storm. PublicInvest Research, in an initiation report on the stock this week, notes that the current order book will give earnings visibility until 2023.

The other notable development is the recent emergence of Shapoorji Pallonji Mistry, or Shapoor Mistry, as a board member of the company.

News of Shapoor’s appointment on Oct 28 went largely unnoticed. The 50-year-old Shapoor, an Irish citizen, is the eldest son of construction magnate Pallonji Shapoorji Mistry, who is one of India’s most successful and powerful businessmen.

The Mistry family flagship, Shapoorji Pallonji Company Ltd, is a diversified business group that operates across India, West Asia and Africa.

More interestingly, Pallonji also has an 18.5% stake in Tata Sons – the holding company of the Tata Group – making him its single largest shareholder. This holding accounts for a substantial chunk of Pallonji’s US$15.9bil (RM53.35bil) fortune, according to Forbes India’s “100 Richest Of 2014”. This wealth places the 85-year-old at number four on the list, as well as possibly being the richest Irishman in the world.

India Today in a feature two years ago wrote that Pallonji is an Irish citizen, by virtue of his marriage to an Irish woman, but that he lives mostly in India.

The media-shy tycoon has passed on the reins of his business empire, with Shapoor now the chairman and managing director of the Shapoorji Pallonji group. Shapoor is also chairman of Forbes & Co Ltd (FCL), which is listed on the Bombay Stock Exchange, and chairman of Eureka Forbes Ltd. Both companies are subsidiaries of the Shapoorji Pallonji group.

His younger son Cyrus Pallonji Mistry took over the reins of Tata Sons from Ratan Tata about two years ago, making it the second time in the company’s century-old history that a non-Tata is heading the group.

FPSO opportunities

According to a Bursa Malaysia announcement, FCL has partnered with Bumi Armada in three joint-venture entities incorporated in India, which own and operate certain floating production, storage and offloading vessels (FPSO) and offshore support vessels (OSV), offshore India.

Some industry observers reckon that Shapoor’s entry into Bumi Armada could lead to more partnerships between the two parties for the FPSO business in India.

Bumi Armada marked its presence in the FPSO business in India two years ago via a partnership with the Shapoorji Pallonji group and is the second FPSO provider in India after Reliance Industries Ltd.

The market for FPSO in India is huge, not only for deepwater, but also shallow water. FPSO are floating vessels, which are used for the storage and processing of O&G.

A mid-October report in the RigZone portal quoting Bumi Armada chief executive officer, Hassan Basma, stated that the company sees potential demand for as many as 30 FPSO off India in the next five years, as state-owned Oil and Natural Gas Corp Ltd (ONGC) ramps up cluster developments of O&G fields. In the report, Hassan described India as “a good address” for FPSO contractors, with numerous “clusters of small fields” in ONGC-operated offshore blocks waiting to be commercialised.

India is not an unfamiliar market for Bumi Armada’s major shareholder, T Ananda Krishnan, who has a presence in the telecommunications sector via his flagship Maxis Communications Bhd’s stake in Aircel Ltd. Aircel is India’s fifth-biggest telecommunications player.

According to reports, Ananda and his chief corporate lieutenant Ralph Marshall are being investigated for alleged improprieties over the sale of a stake in the Indian telco to Maxis Communications in 2011. Maxis Communications, which is also the single largest shareholder of Bursa Malaysia-listed Maxis Bhd, has denied allegations of constricting the business environment in India.

Share price-wise, Bumi Armada has not been a great performer on Bursa since its relisting in 2011 at an offer price of RM3.03.

However, it has won significant contracts that are long-term in nature at pre-agreed chartering fees. This, analysts say, would give it a stable earnings stream up to 2018 regardless of the oil price movement, which hit US$75.58 per barrel on Friday.

The fifth-largest player in the global FPSO league, it has delivered five FPSO vessels to-date, and its sixth FPSO, Armada Sterling II, recently set sail on schedule from Keppel’s Singapore yard for India.

Its seventh and eighth FPSO, Kraken and 15/06, are now under conversion in Singapore, on schedule to be installed by late-2016.

The FPSO segment is Bumi Armada’s main earnings driver, making up 85% of its orderbook and contributing 60% of its 2015 estimate earnings. It is tendering for six more FPSO contracts in Africa and Brazil.

It also has a strong footing in the Caspian Sea transportation and installation (T&I) market and is an established OSV provider. Its OSV portfolio comprises of 56 vessels, of which seven have been earmarked for disposal.

However, analysts note that since its listing in 2011, Bumi Armada has yet to secure any contracts for its oil field services (OFS) division. “Now that some oil companies are re-evaluating their capital expenditure plans due to lower oil prices, we believe that there will be setbacks for Bumi Armada’s OFS segment,” Affin Hwang Capital says in a recent report.

Bumi Armada is hopeful it can complete the US$1.2bil (RM3.76bil) Madura BD Field FPSO contract that is located 16km south of Madura Island, offshore Indonesia. A letter of intent was signed in August this year, but the parties have yet to enter into a formal contract.

Recently, the company and Husky-CNOOC Madura Ltd mutually agreed to extend the execution date of the contract for the second time, stating that relevant internal approvals were being procured for it.

To fund expansion, the company has raised RM1.9bil in cash proceeds from its rights issue exercise in August. PublicInvest Research notes that the stock’s gearing ratio stands at about 1.1 times as of the second quarter of financial year 2014 (FY14), which should reduce to about 0.7 times in FY14, assuming increased repayment and reduced borrowings from the rights issue. Its net debt-to-earnings before interest, taxes, depreciation and amortisation is now on the high side at 4.0 times in second-quarter FY14.

On Thursday, Bumi Armada announced that its net profit had fallen by 21% year-on-year to RM271mil for the nine months of FY14 on weaker earnings from the T&I and OSV divisions. Analyts are mixed on the stock’s financials, with RHB Research downgrading its recommendation to “neutral” and cutting its FY14 and FY15 earnings forecasts by 21% and 13%, respectively.

Hong Leong Investment Bank, meanwhile, says that Bumi Armada’s FY14 earnings have been adjusted downwards by 7% to reflect slower earnings recognition for its Kraken and Angola projects.

However, it says the underlying cash flow for both the FPSO projects remains unchanged. The firm has maintained its “buy” call on Bumi Armada, but has reduced the target price to RM1.74 from RM2.06 earlier.

In the past one week, Bumi Armada’s share price seems to have stabilised. Surprisingly, this comes on the heels of the board seeing some changes. Whether the worst is over for the company is something that will be known in the months to come.

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