Hong Leong Investment Bank Berhad (10209-W)
1 HLIB Research l www.hlebroking.com
21 July 2020
Sector Outlook: 2H20
HLIB Research PP 9484/12/2012 (031413)
Oil & Gas
Low Jin Wu [email protected] (603) 2083 1711
NEUTRAL (Maintain)
Stock Rating
Stock Rating Price Target ARMADA BUY 0.22 0.41 CCM HOLD 1.27 1.34 DAYANG HOLD 1.20 1.22 DIALOG BUY 3.84 4.23 MHB HOLD 0.38 0.37 MISC HOLD 7.90 8.48 PCHEM SELL 6.18 5.35 SAPNRG HOLD 0.09 0.09 VELESTO SELL 0.15 0.12 WASEONG SELL 0.50 0.38
Subdued capex despite expected recovery
We expect crude oil prices to trade sideways from its June average price in
3Q20 (USD43/bbl) on slower demand recovery arising from potential re-
emergence of lockdown measures from Covid-19, which has worsened in
north/south America, Brazil and India. However, we expect the recovery in
demand from countries recovering from Covid-19 (Europe, Middle East and
China) to mitigate the potential lost in demand from severely affected nations.
We believe that the oil market would be closer to its equilibrium in 4Q20
(USD50/bbl) and we expect Brent crude oil to average at USD44/bbl in 2020. We
believe that Petronas would remain conservative on its capex spending and we
expect it to come below its planned capex cuts of 21%. We believe that it is still
not the time to bottom fish for upstream O&G services names. Bumi Armada
(TP: RM0.41; BUY) is our top pick for the sector as we believe it is relatively
insulated from the volatility and fluctuations in oil prices and capex spending
from oil majors.
Production cuts to continue into 3Q. We believe that OPEC+ would continue its
9.7mbpd production cuts target into 3Q20 to support oil prices. While compliance was
only 85% in May and c.90% in June, we believe that OPEC+’s compliance would be
higher going into July and Aug despite its plans to reduce production cuts by 2m to
7.7m bpd from Aug onwards, which would bring the oil market closer to equilibrium.
Furthermore, the decline in US production from the closure of shale rigs would also
act as an impetus for the oil market to reach equilibrium.
Petronas’ 2021 capex cuts. Petronas has announced that it has planned to cut
capex by 21% (c.RM10bn) due to the crash in oil prices as a result of Covid-19 and
we do not rule out the possibility of this going beyond its 21% pledged capex and our
base case assumes a 30% cut. Malaysian O&G services players are predominantly
dependent upon Petronas’ spending for its survival and any capex cuts from Petronas
would directly impact most listed O&G players in Malaysia. We expect fabrication,
engineering works to be deferred, significantly lower utilization for jack-up rigs/OSVs
and deferrals of MCM, HUC and plant turnaround contracts. The majority of these
contracts were previously awarded on an on-call basis and Petronas has the
prerogative to halt or postpone projects if the need arises. We are negative on
companies which are heavily reliant on Petronas’ capex spending as we believe that
Petronas would be conservative on its capex spending at least until 1HFY21 and we
remain neutral to positive on companies less reliant on Petronas’ capex.
Petrochemical products price recovery not enough to warrant an upgrade for
PCHEM. Although we believe that PCHEM is in a better financial position right now
since the recovery in crude oil and polyethylene prices, many product prices are still
down by more than c.20% YTD. We also believe that the Covid-19 pandemic would
still result in subdued demand for most petrochemical products and it has the potential
to exacerbate demand of key products like methanol and paraxylene. We view that
the share price of PCHEM has ran ahead of its near-term fundamentals as most
product prices (except polyethylene and urea) are still significantly below its price at
the start of the year, while PCHEM’s share price has recovered significantly.
Reiterate NEUTRAL. We like (i) Bumi Armada (BUY, TP: RM0.41 based on 10.3x
FY20 EPS) for its stable and strong FPSO earnings contribution (>80% of revenue)
and undemanding valuations and (ii) Dialog (BUY, TP: RM4.23 based on DCF with a
WACC of 7%) for its stable and cash-strong business model as tanker rates are
holding steady. We are negative on oil services companies with a heavy reliance on
Petronas’ capex as we believe that it will be conservative on its capex for FY20.
Oil & Gas l Sector Outlook: 2H20
2 HLIB Research l www.hlebroking.com
2H20 Outlook Brent forecasted to average at USD44/bbl for 2020. We expect Brent crude oil price to trade
higher sequentially on demand recovery stemming from the ease of lockdown measures globally.
However for 3Q20, we expect oil prices to trade sideways from its June average price
(USD41/bbl) on slower demand recovery arising from potential re-emergence of lock-down
measures from Covid-19, which has worsened in north/south America, Brazil and India. While we
believe that OPEC+’s production cuts would continue into 3Q20, we reckon weaker-than-
expected oil demand particularly from the US (25% of global demand) would impede the oil
market’s journey to equilibrium. Overall, we expect demand to recover from most countries which
are in its recovery stage and this will mitigate the potential lost in demand from nations severely
affected by the pandemic. We believe that oil prices would be closer to its equilibrium in 4Q20 and
we expect Brent crude oil to average at USD55/bbl in 2021 as we expect a more balanced oil
market then.
Figure #1 Oil forecast table (average)
Bloomberg, HLIB Research
Figure #2 OPEC planned production cut schedule
OPEC, HLIB Research
Figure #3 Brent and WTI prices
Bloomberg, HLIB Research
Figure #4 Oil demand and supply table forecast
OPEC MOMR, HLIB Research
Oil & Gas l Sector Outlook: 2H20
3 HLIB Research l www.hlebroking.com
Demand recovery to happen sequentially. According to OPEC’s monthly oil report data, the
demand and supply imbalance has never exceeded more than 1m bpd in the last 5 years.
However, since the Covid-19 pandemic, demand fell by a drastic 8.4m bpd from 4Q19 to 1Q20
and another 10.5m bpd in 2Q20, representing a fall in demand of 18.9mpbd from its peak levels in
4Q19 of about 100.8mbpd. This instance is expected to be mitigated by OPEC+’s plans to extend
its 9.7mpd production cuts into July and it could be extended further if demand recovery is weaker
than expected. The oversupply situation is also expected to be mitigated by US’ steep plunge in
production (c.2mbpd) before the pandemic proliferated in the US. World rig count has fallen
considerably from 2019, mainly driven by the fall in US shale rigs due to low oil prices. Total rig
count has fallen by 43% from its peak in 3Q19 and total oil rig count has fallen by about 45%,
representing one of its steepest declines ever.
Figure #5 World oil rig count and crude build
EIA, HLIB Research
We expect the oil market would to reach a level closer to equilibrium in 4Q20 even if OPEC+ were
to increase its production by 2m bpd from Aug onwards as (i) demand from other economies are
expected to pick up from the relaxation of lockdown measures, (ii) OPEC+ is expected to reach a
higher level of compliance for its pledged cuts in 2H20 and (iii) continued production declines from
shale rigs in the US.
While we expect demand to pick-up to pick up in 3Q20 in most nations in-line with IMF’s
expectations, we do not rule out the possibility of demand softening significantly from North and
South America (25% of global demand) as Covid-19 cases there have spiked up profusely over
the last few weeks. We also believe that the recent re-introduction of lockdowns in Beijing and
Australia are potential risks towards the oil market demand as well.
Figure #6 Oil demand and supply balance graph
OPEC MOMR, HLIB Research
Oil & Gas l Sector Outlook: 2H20
4 HLIB Research l www.hlebroking.com
On the downside, we believe that oil could average at about USD30-35/bbl in 2HFY20 if
coronavirus spirals out of control once again. Our worst case scenario assumes a re-introduction
of stay lockdown measures for most major affected states in countries severely affected by the
virus. However, we opine that oil demand could surprise on the upside if a vaccine is found
sooner-than-expected. With this, countries would be able to accelerate its economic recovery and
hence, elevate oil demand.
US crude oil production might never return to its pre -Covid-19 levels in the foreseeable
future. We believe that US oil production might never return to its 13m bpd production (Feb 2020)
as we believe companies do not have adequate funding to drill new wells even if oil prices were to
rise sharply. Several US shale producers have restarted shut-ins at USD39/bbl WTI price.
According to Enverus and IHIS Market, production would take at least until 2023 to return to its
pre-oil price crash levels. Estimates from Deloitte has also shown that the shale industry booked a
total of USD300bn in net negative cash flow and have written down about USD450bn in invested
capital and has saw more than 190 bankruptcies since 2010. This instance would make banks
more unwilling to fund any shale related acquisitions or investments.
We believe that the fall in US shale rig counts is the primary reason behind the fall in US crude
production. Based on figure #7, the impact of lower US production has been able to reduce crude
build up significantly when Covid-19 became very serious in the US. We believe that the lower
production currently witnessed coming out of the US is here to stay in the near future, which is
one of the reasons why believe that the global oil market could inch closer to an equilibrium in
4QFY20.
Figure #7 US oil rig count and weekly production
Baker Hughes, EIA, HLIB Research
Oil & Gas l Sector Outlook: 2H20
5 HLIB Research l www.hlebroking.com
Figure #8 US Ending stocks and crude build up
EIA, HLIB Research
Petronas to take a conservative stance at least until 1H21. Petronas is expected to reduce its
capex spending for the year by 21% from due to the slump in oil prices. Recall that Petronas
previously pledged to spend about RM50bn on capex in 2020 with about RM26-28bn allocated for
domestic capex. We expect Petronas’ capex for the year to stand at about RM35bn instead of the
c.RM40bn which was previously announced in view of the negative outlook in the O&G industry
as fear of Covid-19 mounts.
Of this RM35bn of capex spending, we expect about 60% of it to be spent in Malaysia. With this,
we foresee companies with a huge concentration risks towards Petronas contracts to suffer. We
expect maintenance works umbrella contracts like the Integrated Hook-up and Commissioning (I-
HUC) and the maintenance construction and modification (MCM) works awarded to Dayang and
Serba Dinamik to be deferred until oil prices reaches a higher and more stable level. We also
foresee the postponement of fabrication and engineering works for most production platforms to
be delayed and these delays would continue to plague MMHE and Sapura Energy. We expect
HUC and MCM man-hours to decline by 25-33% in 2020 followed by gradual improvements of
about 5-6% in FY21 from Petronas’ initial targets taken from the Petronas 2020-2022 activity
outlook.
Figure #9 Projected HUC man-hours
Petronas Activity Outlook 2020-2022, HLIB Research
Oil & Gas l Sector Outlook: 2H20
6 HLIB Research l www.hlebroking.com
Figure #10 Projected MCM man-hours
Petronas Activity Outlook 2020-2022, HLIB Research
Figure #11 Projected Plant turnaround activities
Petronas Activity Outlook 2020-2022, HLIB Research
We also foresee a significant reduction in Petronas’ exploration spending as most oil producing
nations are working together to reduce the oversupply situation caused by the Covid-19
pandemic. We foresee a massive reduction in the utilization of Jack-up rigs, Tender-rigs and this
is expected to lead to lower demand for OSVs as they are used largely to mobilise jack-up rigs.
Recall that back in 3QFY16, Velesto Energy had 0 rigs utilized in for a month as Petronas has the
prerogative to not utilize its rigs if need be. While Velesto still has most of its rigs chartered as of
1HFY20, we foresee utilisation decreasing sequentially if oil prices do not recover to a level of
comfort to Petronas. We also expect Sapura’s tender drilling rig segment to suffer as it is
extremely reliant on Petronas to charter its tender-rigs. Tender rigs also tend to fare weaker in
times of low oil prices as they are significantly more expensive than jack-up rigs to charter as the
former are more specialized drilling rigs which can drill more wellheads at deeper depths, more
suitable for large scale specialized exploration drilling. While OSV, which has started to show
signs of recovery in 3QFY19, it has begun to deteriorate in 1QFY20 and is expected to decline
further going forward as the oversupply situation of the OSV segment is expected to be
exacerbated by cuts in the usage of drilling rigs and low oil prices. We believe that jack-up rig and
OSV utilisation could fall as much as 30 to 40% in 2HFY20 as Petronas takes a more
conservative stance in its capex spending.
Oil & Gas l Sector Outlook: 2H20
7 HLIB Research l www.hlebroking.com
Recovery in Petrochemical prices are slower than expected despite the recovery in crude
oil prices. Most petrochemical prices have experienced its lowest ever price in more than 10
years when Brent crude oil prices plunged to USD20 in late Apr and many products are still
significantly below its prices in the beginning of the year.
While polyethylene prices have gone through a steeper recovery than that of crude oil prices, we
believe that the Covid-19 pandemic would still result in subdued demand for most petrochemical
products and it has the potential to exacerbate demand further if a second wave of the virus were
to occur. The lower economic activity caused by lockdowns globally has significantly decreased
the demand for the formaldehyde and solvent sectors, which make up the bulk of methanol
(c.50% of F&M revenue) consumption.
Figure #12 Polyethylene prices
Bloomberg, HLIB Research
Figure #13 Methanol and Urea prices
Bloomberg, HLIB Research
Oil & Gas l Sector Outlook: 2H20
8 HLIB Research l www.hlebroking.com
Figure #14 PCHEM’s share price performance (RM)
Bloomberg, HLIB Research
On a more positive note, we believe that PCHEM’s fixed ethane supply contract with Petronas is
in a better position now due to the recent recovery in crude oil prices, as the percentage increase
in naphtha prices (feedstock for naphtha based crackers) have been significantly steeper than
other product prices. Recall that when oil prices dipped significantly back in Apr and May, PCHEM
went through a significant share price plunge due to the implied contraction in margins relative to
naphtha players. This was because the plunge in naphtha prices were significantly steeper than
most product prices, giving naphtha based petrochemical players higher margins while PCHEM
suffers from lower margins due to lower product prices as its feedstock cost is fixed. However,
PCHEM is expected to go through a similar situation if oil prices were to crash again.
Figure #15 YTD relative performance of petrochemical product prices to PCHEM’s share price
Bloomberg, HLIB Research
While we believe that we would be able to see improvements in PCHEM’s profits through the
recovery of product prices in tandem with the recovery in oil prices, we believe that PCHEM’s
share price has run above its fundamentals as most product prices are still more than c.20% down
from its price at the start of the year.
Reiterate NEUTRAL. With 2 BUY calls, 5 HOLD calls and 3 SELL calls, we are maintaining our
NEUTRAL call on the sector. We have cut earnings for most companies which would be materially
affected by Petronas’ capex cuts. Our top pick is Bumi Armada (BUY, TP of RM0.41 based on
10.3x FY20 EPS which is -1.75SD below Yinson’s 3 year mean P/E); we believe that Bumi
Armada would not be materially affected by the volatility in the oil market and the stock is also
Oil & Gas l Sector Outlook: 2H20
9 HLIB Research l www.hlebroking.com
currently trading below 5x FY20/FY21 EPS. Bumi Armada has also resolved its solvency issues,
which was a major concern last year. We also reiterate our BUY call on Dialog (BUY, TP of
RM4.23 based on SOP valuation) due to its improving prospects from the expansion of its
terminal business. We believe that it is still not the time to bottom fish for upstream services
names as the outlook for these players remain tepid despite huge declines in most of its share
prices.
Figure #16 Change in rating
HLIB Research
Stock Ratings
Buy Ratings
Bumi Armada. We upgrade Bumi Armada from Hold to BUY at a TP of RM0.41 based on 10.3x
FY20 EPS (-1.75SD below Yinson’s 3 year average PE) as we believe that the company is
undervalued, trading at <5x FY20 EPS. Bumi Armada has experienced sequential improvements
in its quarterly core net profit, driven mainly by its improving FPSO segment. Recall that Bumi
Armada has gone through a myriad of issues with its FPSO Kraken from the end of FY18 until
1QFY19. However, Bumi Armada has since resolved its technical issues with Kraken and it has
been a significant contributor towards FPSO earnings. We believe that Bumi Armada is also in a
much better financial position despite net gearing standing at 2.9x (due to its massive impairment
exercises) as interest cover, net debt/EBITDA ratios and repayment schedules have all improved
significantly based on 1QFY20 numbers.
Dialog Group. We maintain our BUY rating on Dialog, upgrading our SOP-derived TP from
RM3.87 previously to RM4.23 on improving prospects from its expansion of its terminal business
and we increase our earnings assumption by 2/2/2% for FY20-22F. We believe that its steady
storage rates are expected to hold amidst the volatility in the oil market. Its expansion plans for its
tanker business is also on track and it has ample land for future expansions. Its Pengerang
Deepwater Terminal (PDT) facility expansions are expected to drive earnings going forward.
Hold Ratings
MISC. We downgrade our Buy rating for MISC to HOLD at a SOP derived TP of RM8.48 (from
RM8.98), ascribing a lower PB multiple for its tanker segment from (2x to 1.75x) in view of lower
tanker demand in 2HFY20 from the recovery of oil demand; note that freight rates fell sharply in
June 2020. We have also imputed our previously revised TP for MMHE into our valuations. We
cut FY20-21F earnings by 5/2% respectively to factor in lower freight charter rates as we expect
demand and supply of the oil market to balance out in late 4QFY20 and FY21. Most tanker rates
have normalized MoM from its April highs and we believe that this trend is expected to continue
into 2HFY20.
Oil & Gas l Sector Outlook: 2H20
10 HLIB Research l www.hlebroking.com
Figure #17 Vessel charter rates
MISC
Malaysian Marine and Heavy Engineering (MMHE). We cut our earnings forecast by 47/38/27%
for FY20-22 in view of the volatile oil market and Petronas’ lower capex spending targets. We
believe that fabricators like MMHE would go through tougher times with regards to vessel orders.
We foresee postponements or deferrals of most of its work orders due to cuts in capex from most
oil majors including its biggest customer Petronas. Nonetheless, we upgrade our Sell rating to
HOLD with an unchanged TP of RM0.37 based on 0.25x BV in view of the recent decline in its
share price.
Sapura Energy. We maintain our HOLD call for Sapura Energy at a TP of RM0.09 based on 0.2x
FY20 P/B (>-1SD below 5 year mean). We believe Sapura would end the year in the red despite
its improved 1QFY20 performance as we expect a contraction of margins to happen in view of the
volatile and uncertain oil market. We also believe that its weak interest coverage ratio of 1.2x and
imminent required principal repayments of its short-term debt are major causes of concern.
Sapura’s stronger net lifting from its SK408 field is expected to mitigate any short-comings
stemming from a margin contraction from its E&C and drilling division.
Chemical Company of Malaysia (CCM). We maintain our HOLD rating on CCM at a TP of
RM1.34 based on 12x FY20 EPS in view of soft caustic soda price as demand for the pulp and
alumina industry is expected to remain tepid due to the Covid-19 pandemic. However, we believe
that its (i) PGW1 reactivation (commercial operations commencement in 2Q20) with +50% volume
increases YoY, (ii) higher demand from gloves for polymers and chlorine, (iii) higher overall
demand for chemicals resulting from the increased demand for hygiene products will help mitigate
the downside risks arising from lower caustic soda prices, which makes up c.15% of revenue and
net profit.
Dayang Enterprise. We maintain our HOLD call for Dayang at a TP of RM1.22 based on 9x
FY20 EPS leaving our earnings assumptions unchanged. We foresee challenging times ahead for
Dayang in FY20 and FY21 due to Petronas’ plans to cut capex by 21% in FY20. We believe that
the pledged capex cuts would negatively affect its PM-MCM and I-HUC contracts, which
constitutes about 75% of its c.RM4bn orderbook. We expect Petronas to defer c.15% of its
planned PM-MCM and I-HUC works slated for FY20. We believe that Dayang is fairly valued at
this juncture as its share price has plunged by significantly from its YTD peak.
Sell Calls
Petronas Chemicals (PCHEM). We maintain our SELL rating on PCHEM but at a higher TP of
RM5.35 (previously RM4.10) based on a higher FY20 EV/EBTIDA multiple of 8x (6x previously)
as we believe that the expected completion of the Pengerang Refining and Petrochemical
complex (PRefCHEM), the recovery in the overall economy and petrochemical product prices will
lift its EV/EBITDA multiple up. We have also upgraded earnings by 9% for FY20, while leaving our
Oil & Gas l Sector Outlook: 2H20
11 HLIB Research l www.hlebroking.com
FY21-22f earnings unchanged in view of the faster than expected recovery in petrochemical
product prices arising from the recovery in crude oil prices. We expect 2QFY20 to be its weakest
quarter for the year as petrochemical product prices were at its lowest in 2QFY20 and we expect
sequential improvements in the following quarters. While we expect a slight improvement in
profitability for PCHEM, we believe that PCHEM’s share price has surpassed its fundamentals as
it has risen significantly faster than most of its product prices. Only polymer and urea has offset its
YTD plunge in prices, while most products are still about c.20% down YTD.
Velesto Energy. We downgrade Velesto from a Hold (TP: RM0.18, based on 0.5x FY20 book
value) to SELL at a TP of RM0.12 based on 0.35x FY20 BV which is -1.2SD below its 5 year
historical mean on weaker utilization stemming from Petronas’ decision to cut capex. We believe
that exploration drilling would be among the first to suffer from Petronas’ lower capex spending.
Hence, we cut Velesto Energy ’s earnings by RM63/97/5m for FY20-22F as we trim down our
blended utilization rate assumptions from c.70% to 60% for FY20 and for FY21 from c.80% to
50%. Assuming no renewal of contract extensions, Velesto Energy would be left with 3 chartered
rigs in 3QFY20 and only 2 chartered rigs in 4QFY20. We have assumed that Velesto will be able
to secure several 6 to 9 months contract next year to bring its total average utilization to 50% in
FY21 and we expect daily charter rates to remain flat at about US$70,000/day.
Figure #18 Sensitivity table analysis for Velesto Energy
HLIB Research
Wah Seong Corporation. We maintain our SELL rating on Wah Seong with a lower TP of
RM0.38 based on a 0.3x or 70% discount to end FY19 BVPS of RM1.27 from our RM0.57 TP
previously based on 8x FY21 EPS. We believe Wah Seong’s heavy reliance on its pipe coating
division will not bode well for them in the current oil market environment as its specialization in
pipe coating is too niche to prosper in the oil & gas industry. The performance of Wah Seong is
heavily dependent upon capital expenditures from oil majors and we expect most oil majors to cut
capex by 20% or more. We opine that its recently secured North Field Production Sustainability
(NFPS) project, which is expected to constitute most of its future earnings, could be delayed
beyond 2021 due to the uncertainty in the oil market amidst the Covid-19 pandemic. Hence, we
increased our net loss assumption for Wah Seong in FY20 by 82% and cut our net earnings
assumption for FY21-22F by 67/37% respectively.
Figure #19 Peers comparison
Stock Mkt Cap (RM m)
Price (RM)
Target (RM)
Rating FYE P/E (x) P/B (x) Yield (%)
FY20 FY21 FY20 FY21 FY20 FY21
ARMADA 1,295 0.22 0.41 BUY DEC 4.4 4.1 0.4 0.3 0.0% 0.0%
CCM 212 1.27 1.34 HOLD DEC 11.1 10.4 0.6 0.6 4.5% 4.8%
DAYANG 1,389 1.20 1.22 HOLD DEC 10.0 8.5 0.7 0.7 0.0% 0.0%
DIALOG 21,651 3.84 4.23 BUY JUN 39.6 35.4 5.6 5.1 1.1% 1.3%
MHB 608 0.38 0.37 HOLD DEC 42.8 24.9 0.3 0.3 7.9% 7.9%
MISC 35,264 7.90 8.48 HOLD DEC 18.5 18.0 1.0 1.0 3.8% 3.8%
PCHEM 49,440 6.18 5.35 SELL DEC 25.8 20.1 1.7 1.6 2.0% 2.6%
SAPNRG 1,438 0.09 0.09 HOLD JAN nm nm 0.1 0.1 0.0% 0.0%
VELESTO 1,191 0.15 0.12 SELL DEC nm nm 0.4 0.4 0.0% 0.0%
WASEONG 383 0.50 0.38 SELL DEC nm 20.9 0.4 0.4 0.0% 0.0%
Note: For non-Dec FYE, refers to FY21-22. HLIB Research
Bumi Armada l Sector Outlook: 2H20
12 HLIB Research l www.hlebroking.com
HLIB Research PP 9484/12/2012 (031413)
Bumi Armada
Low Jin Wu [email protected] (603) 2083 1711
BUY (Maintain)
Target Price: RM0.41
Previously: RM0.24
Current Price: RM0.22
Capital upside 86.4% Div idend y ield 0.0% Expected total return 86.4%
Sector coverage: O&G
Company description: Armada is an international
offshore serv ices prov ider to the oil & gas industry
in Malaysia and other countries in Asia.
Share price
Historical return (% ) 1M 3M 12M Absolute -8.3 25.7 -4.3 Relative -13.0 11.9 -0.1
Stock information Bloomberg ticker BAB MK Bursa code 5210 Issued shares (m) 5,886 Market capitalisation (RM m) 1,295 3-mth average volume (‘000) 1,042,979 SC Shariah compliant No
Major shareholders Objektif Bersatu Sdn Bhd 34.8% Amanah Saham Nasional Bhd 11.7% Hong Leong Co Malaysia Bhd 4.0%
Earnings summary FYE (Dec) FY19 FY20f FY21f PATMI - core (RM m) 281.2 295.0 315.3 EPS - core (sen) 4.8 5.0 5.4 P/E (x) 4.4 4.2 3.9
Flourishing through the pandemic
We upgrade Bumi Armada from Hold to BUY at a TP of RM0.41 based on 10.3x
FY20 EPS as we believe that the Company is currently undervalued, trading at
<5x FY20/21 EPS. Bumi Armada has experienced sequential improvements in its
quarterly core net profit, driven mainly by its improving FPSO segment. Recall
that Bumi Armada has gone through a myriad of issues with its FPSO Kraken
from 2H18 until 1QFY19. However, Bumi Armada has since resolved its
technical issues with Kraken and it has been a significant contributor towards
FPSO earnings. We believe that Bumi Armada is also in a much better financial
position despite net gearing standing at 2.9x as of 1QFY20 as interest cover, net
debt/EBITDA ratios and repayment schedules have all improved significantly.
Financial position. We believe that Bumi Armada is in a much better financial
position now as compared to FY18 and FY19 despite net gearing ratios increasing to
2.9x in 1QFY20. We believe that the rise in net gearing is particularly attributable to
impairments done on its OSV assets, which we estimate has been impaired by more
than 90% of its acquisition cost value. Bumi Armada has improved on its interest
cover from <2x in 2Q19 to c.3x in 1Q20 and it has also paid and refinanced a
significant portion of its short-term debt, and its core profit is expected to remain
steady with strong earnings coming from its FPSO business. We believe default and
liquidity risk is not a concern for Bumi Armada at this juncture.
Debt Repayment Schedule. Bumi Armada has refinanced most of its short-term debt
into long term debt in 3QFY19 and the company is in a relatively stronger position vs
2H18. As of 1QFY20, only 18 %of its total debt is short -term and 90% of it is ring
fenced to its FPSO vessels. Also c.50% of its long-term debt is also ring fenced to the
cash flow of its FPSO vessels.
Termination Risk. We believe that termination risk for its major FPSO contracts
(Kraken and Olambendo) are very minimal as (i) the owner of Olambendo is ENI, one
of the largest O&G players in the world with a good track record in honouring its
contracts and (ii) Kraken has been one of the best performing asset for EnQuest. We
believe that in the worst case scenario event where an FPSO has to be terminated by
EnQuest, Kraken will be the last in the pecking order. EnQuest currently has two
FPSOs in the North Sea, Kraken and Magnus, whereby the former has significantly
outperformed the latter over the last few quarters.
FPSO Segment Outlook. We expect Bumi Armada's earnings to be driven
significantly by the consistently strong performance of its FPSO business. Olambendo
should continue to contribute significantly to profits while the Kraken asset is an
impetus towards forward earnings. Also, Bumi Armada's FPSO contract values are
not linked to the fluctuations in oil prices and we can expect earnings to hold steady
even if the oil market starts to retrace again.
OMS Segment Outlook. We believe that the OMS segment will decline in the
quarters to come as Petronas starts reducing its domestic capex. Bumi Armada is
almost a hundred percent reliant on Petronas for its OSV business, with 13 out of 30
of its OSV currently chartered under Petronas. We believe that the utilisation for its
OSVs are expected to decline sequentially in the quarters to come. On a more
positive note, we believe that its OSV segment has already went through huge
impairments and is expected to experience significantly lower depreciation. The
retiring of unutilised vessels would also save cost for the Company. We also expect
Armada Installer to remain idle due to the volatile oil market and the underlying global
economic uncertainty. Overall, we expect OMS segment to perform weaker in the
coming quarters but we have already factored this scenario into our valuation of the
Company and the OMS segment’s profit contribution has been negligible over the
course of FY19.
Forecast. We maintain our FY20-22F earnings assumption. Our earnings assumption
Bumi Armada l Sector Outlook: 2H20
13 HLIB Research l www.hlebroking.com
assumes a CAGR of 4% from FY19-22F.
.
Upgrade to BUY, TP: RM0.41. We upgrade Bumi. Armada from a HOLD (TP,
RM0.24) to a BUY based on 10.3x FY21F EPS (-1.75SD from Yinson’s 3 year
historical mean P/E), changing our SOP-based valuation method to P/E. We believe
that Yinson is a valid comparison as both companies’ earnings are predominantly
attributable to FPSOs and both companies are currently trading at a s imilar net
gearing ratio. Our -1.75SD assumption is premised upon Bumi Armada’s lower growth
prospects as its current focus is to stream line its assets instead of going for growth.
Bumi Armada is currently trading at <5x FY20 EPS while Yinson is currently trading at
about 17x FY20EPS.
Figure #20 Solvency Ratios
Company, HLIB Research
Figure #21 Total debt and breakdown
Company, HLIB Research
Figure #22 Net debt/EBITDA ratio
Bumi Armada l Sector Outlook: 2H20
14 HLIB Research l www.hlebroking.com
Company, HLIB Research
Figure #23 Bumi Armada and Yinson’s relative share price and core net profit
performance comparison
Company, HLIB Research
Bumi Armada l Sector Outlook: 2H20
15 HLIB Research l www.hlebroking.com
Financial Forecast
All items in (RM m) unless otherwise stated
Balance Sheet Income Statement
FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f
Cash 1,226.4 1,103.8 1,426.5 2,167.5 3,022.1 Revenue 2,418.7 2,070.7 2,099.8 2,068.4 2,067.1
Receivables 5,767.1 5,206.6 5,406.8 5,397.6 5,397.2 EBITDA 801.3 930.6 1,448.4 1,469.0 1,502.7
Inventories 7.3 5.6 21.1 20.8 20.7 EBIT 301.9 490.1 690.0 703.5 730.3
PPE 6,692.7 5,940.6 5,321.7 4,696.0 4,063.4 Finance cost (522.1) 555.5 490.4 483.5 478.0
Others 1,847.2 1,722.6 1,722.6 1,722.6 1,722.6 Associates & JV 166.2 147.6 186.3 192.4 160.8
Assets 15,540.7 13,979.2 13,898.7 14,004.4 14,226.0 Profit before tax (2,296.9) 82.2 385.8 412.4 413.1
Tax 22.3 44.0 (88.7) (94.9) (95.0)
Payables 1,056.4 548.1 644.9 635.3 639.1 Net profit (2,319.1) 38.2 297.1 317.6 318.1
Debt 10,380.5 9,490.7 8,990.7 8,790.7 8,690.7 Minority interest (16.4) 0.3 2.1 2.2 2.2
Others 733.6 727.3 727.3 727.3 727.3 Core PATMI 228.1 281.2 295.0 315.3 315.8
Liabilities 12,170.6 10,766.0 10,362.9 10,153.3 10,057.0 Exceptionals - - - - -
Reported PATMI (2,302.8) 352.9 295.0 315.3 315.8
Shareholder's equity 3,363.2 3,227.0 3,514.0 3,829.3 4,146.1
Minority interest 6.9 (13.9) 21.9 21.9 22.9 Consensus core PATMI 286.8 287.9 292.2
Equity 3,370.1 3,213.1 3,535.8 3,851.1 4,169.0 HLIB/ Consensus 1.0 1.1 1.1
Cash Flow Statement Valuation & Ratios
FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f
Profit before taxation (2,296.9) 82.2 385.8 412.4 413.1 Core EPS (sen) 3.9 4.8 5.0 5.4 5.4
D&A 499.4 440.5 758.5 765.5 772.5 P/E (x) 5.7 4.6 4.4 4.1 4.1
Working capital 552.8 152.8 (118.8) (0.1) 4.1 EV/EBITDA (x) 13.3 10.3 6.1 5.4 4.6
Taxation 22.3 44.0 (88.7) (94.9) (95.0) DPS (sen) - - - - -
Others 2,289.8 14.8 (2.1) (2.2) (2.2) Dividend yield - - - - -
CFO 1,067.4 734.3 934.7 1,080.7 1,092.4 BVPS (RM) 0.6 0.6 0.6 0.7 0.7
P/B (x) 0.4 0.4 0.4 0.3 0.3
Capex (534.3) (104.6) (139.6) (139.7) (139.8)
Others 178.4 61.1 - - - EBITDA margin 33.1 44.9 69.0 71.0 72.7
CFI (355.9) (43.5) (139.6) (139.7) (139.8) EBIT margin 37.7 52.7 47.6 47.9 48.6
PBT margin (95.0) 4.0 18.4 19.9 20.0
Changes in debt (1,367.0) (807.6) (500.0) (200.0) (100.0) Net margin 9.4 13.6 14.0 15.2 15.3
Shares issued - - - - -
Dividends - - - - - ROE 6.8 8.7 8.4 8.2 7.6
Others - (5.9) 27.7 - 2.0 ROA 1.5 2.0 2.1 2.3 2.2
CFF (1,367.0) (813.5) (472.3) (200.0) (98.0) Net gearing 271.6 261.3 214.2 172.2 136.2
Net cash flow (655.5) (122.7) 322.8 741.0 854.6 Assumptions
Forex - - - - 1.0 FYE Dec FY18 FY19 FY20f FY21f FY22f
Others 35.8 - - - 1.0 Growth (%)
Beginning cash 1,846.1 1,226.4 1,103.8 1,426.5 2,167.5 Sales Growth 0.7 (14.4) 1.4 (1.5) (0.1)
Ending cash 1,226.4 1,103.8 1,426.5 2,167.5 3,022.1 EBITDA Growth (39.9) 16.1 55.6 1.4 2.3
EBIT Growth (60.2) 62.3 40.8 2.0 3.8
PBT Growth (566.6) (103.6) 369.5 6.9 0.2
Core PATMI Growth (24.2) 23.3 4.9 6.9 0.2
Hong Leong Investment Bank Berhad (10209-W) l Sector Outlook: 2H20
16 HLIB Research l www.hlebroking.com
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Stock rating definitions
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Sector rating definitions
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