This offshore services provider offers a good diversification play on the commodities sector, albeit a risky one
International offshore services provider to the oil and gas industry Bumi Armada owns and operates offshore support vessels for the exploration, development and production activities in the offshore oil and gas industry. The company has two main reporting segments, which are the floating production and operations (FPO) and offshore marine services (OMS). It derives almost 90% of its revenue from the FPO segment, and is currently in the process of exiting its offshore marine services business. Under its FPO segment, the company currently operates the four wholly owned FPSOs, three jointly owned FPSOs, one liquefied natural gas floating storage unit and one partially owned FPSO under construction.
Our case for Bumi Armada is that it is a play on the commodities sector, specifically oil. We think that this company is a good diversification tool — although a risky one — given its stock beta of 2.0. The recovery of oil price should see increasing amounts of activities within the oil and gas sector, and as such companies within the value chain such as Bumi Armada stand to benefit from it.
For its most recent 3QFY2021 ended Sept 30, 2021, results, the company’s net profits increased 5% to RM249 million ($80.3 million), though revenue fell 11% to RM546 million. The revenue fell mainly due to lower vessel availability from the unexpected shutdown of one of the components at its Armada Kraken vessel. The net profits after impairment increased by 10% to RM153 million, while the company’s cash holdings rose 4% to RM909 million. As part of its plans to exit the OMS business, Bumi Armada disposed of its four overseas subsidiaries with the rationale of generating cash inflow to repay its corporate debt, and plans to redeploy the capital into its FPO business.
Trade receivables — which is one of the key metrics for companies within this industry — also saw an improvement, where it declined 22% mainly due to higher receipts from customers and lower revenue recognised for one of its vessels. It is important to note that trade receivables should be as low as possible, while cash flow is key in assessing the true impact to the company’s financials. Other developments for the quarter include a total debt repayment amounting to US$101 million ($136 million). The company’s order book as 3QFY2021 stood at RM14.6 billion, and upon the expiration of the contract period, some contracts have the option to be extended, which are also renewable on an annual basis. The potential value of this order book amounts to RM9.6 billion over the extension period.
Bumi Armada’s performance over the past quarters has also shown great progress in terms of reducing its leverage. For example, its debt to equity reduced from 3 times in 1QFY2019 to 1.96 times in 3QFY2021, while the net debt to trailing Ebitda also improved from 10.5 times in 3QFY2020 to 3QFY2021. The company’s operating profit before impairment has also seen relatively decent growth with the exception of one quarter, rising from RM167 million in 1QFY2019 to RM245 million in 3QFY2021. Overall, the business is growing more profitable and is improving on its financial safety front.
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Bumi Armada’s focus over the next few quarters will be to monetise its surplus assets which should bring in more revenue and provide earnings visibility. Its focus also covers maintaining crucial relationships with clients and partners, which should aid in improving its trade receivables. Furthermore, the scope of its focus covers improving its balance sheet, which should further decrease the liquidity and solvency risk of the company. Also, with the company exiting its OMS business, its focus now is to improve the operational performance of its FPO division — which is good since the company can solely focus on this division to further develop its moat.
Chart 1 illustrates the company’s leverage ratios over time, which has seen good progress. The company is also relatively much cheaper compared to regional peers, as it trades at a 70%, 30% and 64% discount for its forward P/E, EV/Ebitda and P/B respectively.
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Globally, it trades at 48%, 9% and 55% discount respectively for the valuation ratios. The company’s yields are very attractive compared to the benchmark risk free rate of 3.8%, with an earnings yield, operating cash flow yield and free cash flow yield of 18.7%, 46.8% and 44.9% respectively.
Sentiments-wise, there are 12 “buy” calls, four “hold” calls and no “sell” calls on the company from analysts. The average target price for the company is around 15% above its current trading price of RM0.55. Based on our in-house valuations, we think this company has the potential to produce a double digit return over the next 12 months. However, this stock mostly would serve as a good diversification company for the portfolio if commodity prices continue to rise, and is suitable for investors seeking exposure to the commodities sector with a relatively high-risk profile.
