Performance: -26.8%
Bursa Malaysia-listed Bumi Armada was one of the worst performers in our portfolio for the four-month period, with a 26.8% loss. The company is an international offshore services provider that owns and operates offshore support vessels for exploration, development, and production activities in the offshore oil and gas industry. Bumi Armada’s revenue is generated from its three wholly-owned Floating production storage and offloading (FPSO) units, one wholly-owned floating storage unit (FSU), three jointly-owned FPSOs and one partially-owned FPSO under construction.
The thesis for investing in the company is that it is a good diversification tool within our overall portfolio, as it gives investors exposure to the commodity sector, namely oil. The company also has historically shown strong cash flow and free cash flow generation, and has consistently achieved deleveraging targets. Due to the post-pandemic recovery and the war between Russia and Ukraine, oil prices have held at above US$100 ($137) per barrel — a significant pick-up from just over US$70 a year ago. For companies within the oil and gas value chain such as Bumi Armada, this is naturally good news, as they get to meet increased activities and demand for oil and gas-related services such as floating offshore solutions.
Bumi Armada’s latest results show that its revenue, operating profits and net profits all increased from the previous financial period, while maintaining operating costs. Its focus on monetising its surplus assets has been paying off, and along with the company exiting its offshore and marine services business, the performance of its floating production and operations (FPO) can be further improved. The sales of offshore support vessels and development of selected FPSO opportunities should aid in cash flow generation over the next few periods. Furthermore, the company has a solid order book, where more than 80% is from its wholly-owned FPO units extending over the next two years at least, with an optional extension period beyond the year 2030.
At current prices, the company’s yields are extremely attractive compared to the risk-free rate of 4.4%. Bumi Armada’s earnings yield, operating cash flow yield and free cash flow yield are 27.9%, 53.9% and 59.2% respectively. Compared to global peers, the company trades at a 60%, 32%, and 64% discount for its forward P/E, EV/Ebit and P/B, implying that it is very attractive at current prices. Financial safety-wise, through its stellar cash generation, Bumi Armada has managed to more than halve its debt to equity from 3.3 times two years ago to 1.5 times as at the latest financial period. Its interest coverage ratio of 2.4 times should further provide support to the company’s solvency.
Sentiments-wise, there are 14 “buy” calls, three “hold” calls and no “sell” calls from analysts. The average target price for the company is around 65% above its current trading price of MYR0.41 ($0.13). Based on our revised inhouse valuations, we think the company’s fair valuation is at least 35% above its current trading price. Investors seeking commodity exposure should consider Bumi Armada as it has a strong cash flow record and potential — and as the saying goes, “cash is king”.
See also: More upside for Indian equities despite rich valuations
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk.
