bumi armada ipo focus

PP10551/09/2011 (028936)

07 Jul 2011

OSK Research | See important disclosures at the end of this report

1

MALAYSIA EQUITY

IPO Note

Bumi Armada Berhad

Giant With 1-Stop Vessel Solutions

Bumi Armada Berhad (BAB) is an established provider of 1-stop vessel solutions via

its FPSO and OSVs, as well as T&I, OFS and FMS services. BAB has a presence in

more than 10 countries in Asia, Africa and Latin America. The group is supported by

RM5.8bn-strong orderbook, which will keep it busy for the next 2-3 years. We initiate

coverage with a Subscribe/Buy recommendation and fair value of RM3.65, based on

sum-of-parts valuation and equivalent to a PER of 18x FY12 EPS.

4 main units and 2 support units. The main business units include: i) floating production,

storage and offloading system (FPSO); ii) offshore support vessel (OSV); iii) transport and

installation (T&I), and 4) oilfield services (OFS) while its 2 support units include: i) fleet

management services (FMS), and ii) engineering, procurement and construction (EPC).

Nevertheless, we see that its core businesses still remain FPSO and OSV but FPSO will be

the growth driver for the company going forward. Today, it has operations starting from

Malaysia to over 10 countries in Asia, Africa and Latin America.

One more FPSO to join fleet of 4. BAB owns 4 FPSO vessels - Armada Perkasa, Armada

Perdana, Armada Perwira and Armada Prima. Armada Perkasa and Armada Perdana are in

Nigeria, servicing Afren and Eni International B.V respectively. Armada Perwira is servicing

Hoang Long Joint Operating Company (HLJOC) in Vietnam while Armada Prima, which was

acquired in December 2010 as a conversion candidate for BAB’s next FPSO project, will

service Apache Jilimar Pty Ltd in Australia. The group’s 5th FPSO, Monte Umbe, will be

converted by end-2012 and deployed in India.

RM5.8bn-strong orderbook; optional extension for RM2.5bn. This should keep the

company busy over the next 2-3 years. The value of this orderbook should increase over

time in tandem with the anticipated stronger economic outlook and higher oil price.

Initiate with Subscribe / Buy recommendation. Our fair value for BAB is RM3.65 based

on sum-of-parts valuation, which is equivalent to a PER of 18x FY12 EPS. We think this

valuation is fair given the group’s sheer size as well as its capability in providing 1-stop

solutions starting from O&G exploration up to the decommissioning stage. The stock also

deserves a premium over some of its peers given that more than 70% of its business

generates recurring income and a constant flow of cash

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f

Revenue 519.8 732.1 1241.4 1559.3 2096.2

Net Profit 150.0 277.4 351.8 409.0 593.5

% chg y-o-y - 85.0 26.8 16.3 45.1 Consensus - -

EPS (sen) 5.1 9.5 12.0 14.0 20.3

DPS (sen) 0.0 0.0 0.0 4.0 6.0

Dividend yield (%) - - - 1.3 1.9 ROE (%) 34.8 41.4 40.2 23.7 27.0

ROA (%) 6.2 7.2 7.3 5.9 7.2

PER (x) 61.5 33.2 26.2 22.6 15.5

BV/share (RM) 0.19 0.29 0.38 0.76 0.96 P/BV (x) 16.7 10.7 8.2 4.2 3.3

EV/ EBITDA (x) 41.0 25.7 17.3 14.2 10.5

Enlarged Share Capital / Par Value

2.928bn/RM0.20

Indicative Listing Date

21 July 2011

Listing Sought

Main Market

Major Shareholders (post - IPO) (%)

Objektif Bersatu Sdn Bhd 42.5%

Ombak Damai Sdn Bhd 11.6%

Wijaya Sinar Sdn Bhd 7.3% Karisma Mesra Sdn Bhd 5.4%

IPO Details Shares (m)

Public Issue:

- Institutional offering 564.4

- Retail offering 79.8

Offer for sale 234.3

Total 878.5

Utilisation of Proceeds RMm

Repayment of bank borrowings 775

Capital expenditures 592

Working capital 562

Listing expenses 100

Total 2,029

Investment Research

Daily

SUBSCRIBE

RM3.15

Fair Value RM3.65

IPO Price

Jason Yap

+60 (3) 9207 7698

[email protected]

OIL & GAS

OSK Research


2

2

IPO DETAILS

Bumi Armada Bhd (BAB) is seeking a listing with an enlarged share capital of 2.93bn shares of RM0.20

each on the Main Market of Bursa Malaysia. Based on the retail IPO price of RM3.15 per share, BAB will

have a market capitalization of RM9.23bn. It expects to raise gross proceeds of about RM2.03bn from

the flotation. Some 38% of the proceeds will be used to pare down bank borrowings while 29% and 28%

will be used for capital expenditure and working capital respectively. The balance 5% will be used to pay

listing expenses.

Figure 1: Details of share offering from BAB

Source: OSK, Prospectus

Figure 2: Indicative timetable


Figure 3: Breakdown of utilization of listing proceeds


Shareholders Number of %

Shares

m

Retail Offering

- Bumiputera 29.3 3.3%

- Non-Bumiputera 29.3 3.3%

- Directors and eligible employees 21.3 2.4%

Institutional Offering

Bumi investors approved by MITI 336.8 38.3%

Other Malaysian and foreign institutional and selected investors 461.9 52.6%

Total 878.5 100

Date

Opening of the Institutional Offering 28-Jun-11

Opening of the Retail Offering 30-Jun-11

Closing of the Retail Offering 7-Jul-11

Closing of the Institutional Offering 7-Jul-11

Price Determination Date 11-Jul-11

Balloting of applications for the Issue Shares offered under the Retail Offering 11-Jul-11

Allotment/Transfer of the Issue Shares/Offer Shares to successful applicants 19-Jul-11

Listing 21-Jul-11

Details of utilisation RM'm

Repayment of bank borrowings 775

Capital expenditures 592

Working capital 562

Estimated listing expenses 100

Total 2,029

Within 3 months

Estimated timeframe

for utilisation upon listing

Within 6 months

Within 24 months

Within 24 months

OSK Research


3

3

BAB

COMPANY BACKGROUND

BAB was incorporated in Malaysia on 12 Dec 1995 as a public company limited by shares but its history

goes back to 1977. The company is principally an investment holding company with subsidiaries that are

principally involved in the provision of marine transportation, FPSO operations, vessel construction, and

engineering and maintenance services to offshore O&G companies. On 25 June 1997, BAB was listed on

the Main Board of the Kuala Lumpur Stock Exchange and subsequently delisted on 18 April 2003. In

2008, it exited the offshore construction business, which it viewed as non-core. Today, BAB is an

international offshore services provider to Malaysia’s O&G industry in Malaysia and more than 10

countries in Asia, Africa and Latin America. The group is the largest owner and operator of offshore

support vessels (OSVs) in Malaysia and third largest in South-East Asia. It is also ranked ninth globally as

an FPSO operator by fleet size.

Figure 4: Some key milestones


Date Description

1977 Established Bumi Armada Navigation Sdn Bhd (BAN)

1987 Established Haven Automation Industries Sdn Bhd (Haven)

Dec 1995 Incorporated BAB as a public company, organised under 2 main business units, namely BAN and Haven

Jun 1997 Listed BAB on the then Main Board of KLSE (now the Main Market)

Apr 2003 Delisted company from the Main Market

2006 Launched OSV (Offshore Support Vessel) fleet expansion programme, referred to as 'Steel on Water'

2007 Secured contract for their first FPSO (Floating production, storage and offloading system), the Armada Perkasa

2008 The Armada Perkasa commenced operations for Afren in the Okoro-Setu Field, Nigeria

2009 Second FPSO, the Armada Perdana becomes operational

Chartered their third FPSO, the Armada Perwira which will be fully operational in 3QFY11

2010 Acquired their fourth FPSO, the Armada Prima

Mar 2011 Secured a conditional letter for Armada Prima with Apache Jilimar Pty Ltd for the Balnaves development in Australia

OSK Research


4

4

GROUP STRUCTURE

Figure 5: BAB’s corporate structure


Business Units Support Units

Owns and leases FPSOs

- 2 FPSOs in operation (Nigeria)

-1 FPSO to start operations in Vietnam (Q3FY11)

-1 FPSO currently under conversion for projected awarded (via conditional letter of award) in Australia

Floating

Production Storage

and Offloading

(FPSO)

Owns a fleet of 43

OSVs

- 25 AHTS/AHT

- 8 accommodation workbarges/ workboats

- 3 mooring launches

- 1 standby vessel

- 2 SSVs

- 2 utility vessels

- 2 others

Offshore Support Vessels

(OSV)

Transport and

Installation Service

(T&I)

Oilfield

Services

(OFS)

Engineering,

Procurement and

Construction

(EPC)

Fleet Management Services

(FMS)

Pipelay, heavy lift,

subsea installation,

floater and mooring

installation and

marine spread

support services

Owns and operates a

DLB in the Caspian

Sea, off Turkmenistan

Acquired a DP2

subsea installation

vessel recently with

SURF capabilities

Provides services

and solutions for

marginal fields and

EOR

Converted and

sold an FSO to

Petrofac for the

Sepat Field, off

Terengganu,

Malaysia

Conducts in-house

management and

operations of vessel

fleets in all aspects of

operations and

maintenance

Access to over 1,500

crew members

Offices and shore

bases in Malaysia,

Singapore, India,

Brazil, Congo,

Mexico, Nigeria and

Turkmenistan

Provides in-house

EPICC services

which entail

engineering, design,

procurement and

project management

Managed the “Steel

on Water” fleet

expansion program

Managed conversion

of FPSO units and

the construction and

integration of a DLB

unit

OSK Research


5

5

MANAGEMENT BACKGROUND

Hassan Assad Basma. He is the Executive Director and Chief Executive Officer of BAB. He has 30

years of experience in the O&G industry, of which the last 17 years were spent in Asia. En Hassan’s work

experience spans 4 continents, covering Europe, Africa, Middle East, India, South East Asia and

Australia, with involvement in subsea and pipelines, jackets and topsides, through to floaters and floating

solutions. He holds a Bachelor of Science degree (Honours) in Engineering from the University of

Manchester Institute of Science and Technology in the UK.

Shaharul Rezza bin Hassan. The Executive Director and Chief Financial Officer has over 15 years of

experience in corporate finance/fund raising and financial management. Prior to joining BAB in September

2005, he was Usaha Tegas Sdn Bhd’s (UTSB) corporate finance department for 10 years. During his

tenure there, he was involved in various corporate exercises such as mergers and acquisitions,

structuring, fund raising and equity public offerings, including the reverse takeover of Malaysian Tobacco

Company Bhd (now known as MEASAT Global Berhad) and the acquisition and subsequent privatisation

of BAB. He holds a Bachelor of Science degree in Economics from the University of Bristol, UK.

Andrew Day Lamshed. He is BAB’s Senior Vice President, Floating Production Systems. Mr Lamshed

joined BAB in October 2006 and has over 25 years’ experience, predominantly in the O&G industry. He

started his career in capital equipment manufacturing, with roles in engineering and sales of large rotating

equipment to the major oil companies. He also progressed through various project engineering, asset

consulting, project management and project development roles with Fluor Corporation, Melbourne,

Australia and Clough Engineering Ltd in Perth, Australia. He was appointed the Project Director of the

OMV Maari project with Clough Engineering prior to joining BAB. He holds a Bachelor of Engineering

degree (Mechanical) from Australia’s Ballarat College of Advanced Education and a Master of Business

Administration degree from Monash University, Australia.

Wee Yam Khoon. He is the Senior Vice President, OSV. He joined Bumi Armada Navigation SB (BAN) in

1978 as one of its founders. He is the longest serving staff member, with over 30 years of experience in

BAB. Mr Wee is one of Malaysia’s most experienced players in the OSV segment and is mainly

responsible for BAN’s performance. He is also one of the pioneers of BAB’s “Steel on Water” OSV fleet

expansion programme and has worked on the open up of new operations in Congo, Mexico and

Venezuela. Mr Wee holds a Diploma in Accounting from the London Chamber of Commerce and Industry

in the UK.

Massimiliano Bellotti. The Senior Vice President, T&I joined BAB in July 2008. He has more than 14

years’ professional experience in management, engineering and construction within the offshore O&G

industry with involvement in ultra-deepwater and shallow water developments, including subsea

pipeline/flowlines/platforms engineering, construction and installation, and barge/vessel upgrading. He

was a Project Director of the Blacktip project and Sakhalin II Offshore project while working with Saipem

S.p.A. in Indonesia, Russia, Singapore and Australia. He holds a Master of Science in Aircraft Preliminary

Design degree from Delft University of Technology in the Netherlands and a degree in Aircraft

Engineering from Italy’s University of Pisa.

Figure 6: Summary of BAB’s key management


Name Age Designation/Function

Hassan Assad Basma 54 Chief Executive Officer

Shaharul Rezza bin Hassan 39 Chief Financial Officer

Andrew Day Lamshed 49 Senior Vice President, Floating Production Systems

Wee Yam Khoon 56 Senior Vice President, OSV

Massimiliano Bellotti 42 Senior Vice President, T&I

Adriaan Petrus Van De Korput 53 Senior Vice President, Projects

Madhusudanan Madasery Balan 46 Chief Talent Officer

Jonathan Edward Duckett 41 Senior Vice President, Corporate Planning

Noor Azmi bin Abdul Malek 46 Vice President, BAE

Noval D'avila Paredes 48 Vice President, Corporate Health Safety Environment Quality ("HSEQ")

Choong Guan Huat 58 Vice President, Strategic Procurement

OSK Research


6

6

PRINCIPAL ACTIVITIES

4 main and 2 support units. BAB has 4 main business units, which are: i) floating production, storage

and offloading system (FPSO); ii) offshore support vessel (OSV); iii) transport and installation (T&I), and

iv) oilfield services (OFS). It also has 2 support units, which are: i) fleet management services (FMS), and

ii) engineering, procurement and construction (EPC). Nevertheless, the company’s bread and butter is its

FPSO and OSV business, which generated about 45% and 55% of revenue in FY09 respectively and

44% and 34% in FY10. BAB’s record of consistent execution and its in-house expertise throughout the

value chain allows the group to expand its vessel deployment footprint beyond its base in Malays ia to

more than 10 countries in Asia, Africa and Latin America.

Figure 7: BAB’s participation in the offshore field lifecycle


Figure 8: FY09 revenue breakdown Figure 9: FY10 revenue breakdown

Source : OSK, Prospectus


Floating production, storage and offloading system (FPSO). BAB provides FPSOs, which are vessels

(either converted oil tankers or newbuilds) that are used for receiving hydrocarbons sourced from remote

oil fields. The FPSO is a technical and cost-effective solution that eliminates the need to install large fixed

oil production platforms or lay expensive long-distance seabed pipelines from oil fields to a receiving

terminal. In terms of track record, BAB was the first company to own and operate an FPSO in Malaysia

with the launch of Armada Perkasa in 1997. Currently, BAB has 2 FPSOs operating in Nigeria, namely

Armada Perkasa and Armada Perdana. In 2009, the group chartered out its third FPSO, Armada Perwira

(currently undergoing conversion), for a contract in Vietnam and in December 2010, it acquired Griffin

Venture (which has since been renamed Armada Prima), as a conversion candidate for its next project.

The group has also secured a purchase option on the 1997-built, double hull, 107,222 deadweight tonne

Aframax tanker, Monte Umbe, as a conversion candidate for its upcoming FPSO project in India. The

FPSO business will be the company’s key focus as FPSO contracts provide stable and recurring cash for

the offshore business.

Surveying and

exploration

Seismic surveying

and drilling

Development/

Construction

Installation of

platforms, subsea

structures and

pipelines

Production

Oil extration, supply

storage and

maintenance of

production units

De-

commissioning

Removal of

installations

FPSO √

OSV √ √ √ √

T&I √ √ √

OFS √ √ √

FMS √ √ √ √

EPC √ √ √

Bu

sin

ess

Un

its

Sup

po

rt

Un

its

FPSOs45%

OSVs55%

FPSOs44%

OSVs34%

T&I22%

OSK Research


7

7

Offshore supply vessels (OSV). BAB is one of the largest OSV owners and operators in South East

Asia (source: BAB independent Market Research Report by ISL), with over 40 vessels of various types

operating in Malaysia, Brunei, Vietnam, Congo, Nigeria, Venezuela and Mexico. The group owns,

operates and charters vessels that support off-shore O&G exploration, development and production

activities. The vessels available for charter include anchor handling tug (AHT), anchor handling towing

support (AHTS), accommodation workboats, mooring launches, standby vessels, straight support vessels,

utility vessels, oil recovery vessels and survey support vessels. In 2006, it embarked on an OSV fleet

expansion programme named “Steel on Water”, which was completed in 2010. Via the programme, the

group constructed 20 new OSVs worth a total of RM1bn in anticipation of a shift in exploration and

production away from continental shelf shallow waters towards deeper waters and harsher environments

which require more sophisticated and higher horsepower OSVs. The introduction of these new OSVs will

enable the group to strengthen its position in the international offshore sector.

Transport and installation (T&I). BAB started providing T&I services in 2010 under 2 main areas: i)

pipeline and platform installation, and ii) floater installation (including riser hook-up). Its floater installation

expertise complements the FPSO business. Its key asset, the Armada Installer, is a purpose-built derrick

lay barge (DLB) which has been commissioned and in operation since 2QFY10 in the Caspian Sea, off

Turkmenistan, on an 8-year contract from Petronas Carigali. In 2011, the group acquired Acergy Hawk, a

dynamic positioning (DP2) subsea installation vessel. It intends to acquire other cost-effective assets to

expand in Brazil, West Africa and India and also in the provision of conventional installation services. Oilfield services (OFS). BAB initiated activities in the OFS segment with the conversion and sale of a

floating storage and offloading vessel (FSO) to Petrofac, for deployment to the Sepat field off

Terengganu. The OFS business entails the provision of various specialized services required in offshore

mature/brownfield activities, enhanced oil recovery (EOR) and in the risk-based service contract (RBC)

markets. In tandem with the Government’s investment in this segment through the Economic

Transformation Programme (ETP), the company sees huge potential in the OFS segment, which will be

its key strategic focus in Malaysia moving forward. The company plans to offer a range of services

covering all aspects of the oil field life-cycle starting from exploration through to development, production

and abandonment.

Fleet management services (FMS). BAB’s in-house FMS helps to enhance its operational and execution

capabilities. Backed by its Barber Ship Management System (BASS), the group operates and maintains

its fleet of vessels. This system is a critical operational component as it coordinates the entire fleet and

over 1,100 crew members in more than 10 countries worldwide.

Engineering, procurement and construction (EPC). BAB’s in-house EPC capabilities have proved their

worth in managing tight delivery schedules and budgets. These capabilities are supported by various

systems and procedures including ISO certification as well as engineering software and document control

systems. As testament of its EPC capability, the group concurrently managed 3 large projects valued at

over USD800m across its OSV, FPSO and T&I businesses throughout the recent economic crisis. In

tandem with the company’s expansion, its in-house EPC capability is a key strength in proactively

controlling costs as well as managing and mitigating execution risks, which would not have been possible

if this function is outsourced to a third party.

OSK Research


8

8

VESSEL FACILITIES

FPSO business unit. BAB currently owns 4 FPSO vessels - the Armada Perkasa, Armada Perdana,

Armada Perwira and Armada Prima. Converted and commissioned as an FPSO in 1997, Armada Perkasa

is currently servicing Afren in Nigeria’s Okoro-Setu Field - its third project. The single hull vessel which

accommodates up to 67 persons was built in 1975 and was converted into an FPSO in Singapore’s

Keppel Shipyard. The total net production of its current contract up till March 2011 is 15.2 million bpd. The

58,557-tonne Armada Perkasa is one of the few FPSOs in the world to have serviced more than 2

contracts. Armada Perdana, a single hull with side impact protection vessel which accommodates up to

87 persons, is currently chartered by Eni International B.V’s (ENI) subsidiary, Nigerian Agip Exploration

Ltd (NAE) in Nigeria’s Oyo Field. The 156,483-tonne vessel, built in 1984 and converted into an FPSO in

2009, has total net production up till March 2011 of 3.6 million bpd. BAB is currently in discussions with

NAE to revise the contract from a firm 5-year term to 10 years. Its third vessel, Armada Perwira, is

currently on charter with Hoang Long Joint Operating Company (HLJOC) in Vietnam for an initial 7-year

period, which may be extended for additional one-year periods for a further 8 years. Built in 1996, it was

converted into an FPSO in 2011. The double hull vessel weighs 147,000 tonnes and can accommodate

up to 100 persons. The company’s fourth vessel, Armada Prima (formerly known as Griffin Venture) was

acquired in December 2010 as a conversion candidate for BAB’s next FPSO project with Apache Jilimar

Pty Ltd for the Balnaves development in Australia. Similar to Armada Perwira, the double hull vessel -

which weighs 102,123 tonnes - secured its conditional letter of award on 30 March 2011. Finally, BAB

secured a letter of award in June for its fifth FPSO project for an initial firm period of 7 years, which may

be extended for 6 years in India’s D1 Oilfield. Management has confirmed that it will be deploying the

Monte Umbe for this project and expects its conversion to be completed by end-2012.

Figure 10: Armada Perkasa Figure 11: Armada Perdana

Source : Prospectus

Source : Prospectus

Figure 12: Armada Perwira Figure 13: Armada Prima

Source : Prospectus

Source : Prospectus

Figure 14: Contract periods of BAB’s FPSOs


2007 2010 2015 2020

Armada Perkasa Nigeria: Afren 2008-2013 (2018)

Armada Perdana Nigeria: NAE 2009-2014 (2019)

Armada Perwira Vietnam: HLKOC 2011-2018 (2026)

Firm Period Option Period

OSK Research


9

9

OSV business unit. As the principal contributor to the group, BAB’s OSV business consists of 43 vessels

of various types. Its newer and more powerful OSVs will enable the group to garner a larger share of the

higher margin deepwater segment. More than 50% of its fleet is aged 5 years or less while the average

age of the entire OSV fleet is about 7 years. Over 90% of the OSV fleet is on time charter to customers.

These vessels have brake horsepower (bhp) ranging from 750bhp – 12,000bhp.

Figure 15: AHTS’ daily charter rates range Figure 16: AHTS and average utilization rate



Figure 17: Accommodation workboat/barge’s daily charter rates

Figure 18: Accommodation workboat/barge and average utilization rate



Figure 19: Other OSVs’ daily charter rate range

Figure 20: Other OSVs and average utilization rate



1.32USD1.22 USD1.15

USD3.85

USD2.82

USD3.57

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

201020092008

USD per bhp per day

Year Utilisation Rate (%) No. of OSVs

2010 65.7 23

2009 86.9 18

2008 95.1 14

USD63.92 USD63.92 USD58.43

USD257.50USD257.50

USD174.59

$-

$50

$100

$150

$200

$250

$300

201020092008

USD per bed per day


2010 80.0 8

2009 91.2 8

2008 91.1 6

USD1076

USD534USD569

USD5000

USD5628

USD6902

$-

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

201020092008

USD per unit per day


2010 73.4 9

2009 61.9 19

2008 85.2 16

OSK Research


10

10

Figure 21: Summary of vessels owned by BAB’s OSV business unit

Source: Prospectus

T&I business unit. BAB’s T&I segment only commenced operation in 2010. This segment’s key marine

asset is Armada Installer, a purpose-built DLB constructed in Singapore and integrated in the Caspian

Sea. It operates in water depths of between 8 metres and 300 metres, and has been commissioned and

in operation since 2Q2010 in the Caspian Sea off Turkmenistan for an 8-year contract from Petronas

Carigali. Its expertise in floater installation complements its FPSO business. The T&I business unit

manages the installation of the FPSO Armada Perkasa in the Okoro-Setu Field in Nigeria, as well as

installed all the pre-set moorings for the FPSO Armada Perdana in Nigeria’s Oyo Field. It will also be

supporting the installation of the FPSO Armada Perwira in Vietnam and installing the FSO in the Sepat

Field off Terengganu in Malaysia. Going forward, the company plans to expand its T&I services with

subsea umbilicals, risers and flowlines (SURF) capabilities. Hence it has acquired the Acergy Hawk, DP2

subsea installation vessel. We understand that the acquisition will enable the group to offer SURF

installation as a complementary service to its FPSO business when bidding for new projects, as well as

give it the ability to bid directly on SURF installation packages and inspection, repair and maintenance

(IRM) projects.

Figure 22: Armada Installer Figure 23: Acergy Hawk

Source : Prospectus

Source : Prospectus

CUSTOMERS

FPSO and OSV customers. BAB’s top customers are NAE, Afren, Petronas Group and HLJOC, which

together contributed 10% or more to the group’s revenue during each of the last 3 years ended 31 Dec

2010. FPSO contracts tend to be long-term firm contracts of 5 to 10 years and at the end of the initial firm

contract period, their customers have the option of extending the contract periods for additional 1-year

periods up to a maximum of 5 to 8 years. In the OSV business, the group intends to focus on assets that

generate higher margins by offering value added services and capabilities that will enable it to move up

the OSV value chain. Given its long working relationship with its customers, we expect the revenue

contribution from BAB’s FPSO and OSV business to grow in tandem with its growth plan.

Vessel Type No. of vessels

AHTS/AHT 25

Accommodation workbarge/workboats 8

Mooring launch 3

Standby vessel 1

SSV 2

Utility vessels 2

Others 2

Total 43

OSK Research


11

11

Figure 24: Top customers’ contributions in the FPSO and OSV business


THE SUPPLIERS

Purchases mainly for construction of new vessels. BAB is not dependent on any one particular major

supplier, which lowers the bargaining power of suppliers. Its purchases mainly comprise shipyard slots,

spare parts and other equipment, which are easily available from various shipyards and suppliers. The

group has strong business relationships with suppliers such as Keppel Shipyard Ltd, Kencana Bestwide

Sdn Bhd, Solar Turbines International, Rolls-Royce Singapore Pte Ltd, Nam Cheong Dockyard Sdn Bhd,

Drydocks World-Singapore Pte Ltd and Converteam Group SAS, from which it procures supplies at

competitive prices. Keppel Shipyard Ltd has been a major supplier for the past 3 years, accounting for

23%, 37% and 11% of its purchases in FY08, FY09 and FY10 respectively. We believe this long term

relationship plays an important role because Keppel Shipyard Ltd understands BAB’s requirements better

and would offer more favorable prices for its supplies.

THE WORKFORCE

Bulk of workforce is offshore crew. BAB has 464 on-shore employees and more than 1,500 crew

members who are based in off-shore locations throughout the globe and are part of a multi-cultural team

comprising many nationalities. The off-shore employees can be recruited on a permanent and/or

contractual basis, depending on the company’s requirements. With such a huge workforce, it is not

surprising that the labor cost has been accounting for about 20% of BAB’s total cost of sales since FY08.

Figure 25: BAB’s workforce (no. of staffs) Figure 26: BAB’s workforce (%)



THE COMPETITION

FPSO business highly competitive. Competition in the FPSO segment is defined by technical and

financial capabilities and the pricing of a proposed solution. Currently, there are 3 sub-segments in the

FPSO segment: the large players (with more than 10 units each) such as Modec, BW Offshore ASA and

SBM; medium-sized players (with 3 to 6 units) such as BAB, Bluewater and Teekay and the small-sized

FPSO players (1 to 2 units) such as Rubicon and Sevan. These sub-segments also reflect the size of the

projects that the industry players generally pursue, with the large players bidding for projects of USD750m

0.0

50.0

100.0

150.0

200.0

250.0

FY08 FY09 FY10

RM'm

Petronas

NAE

Afren

HLJOC

Workforce category As at 1-Jun-11

On-shore workforce 464

Off-shore workforce 1577

23%

77%

On-shore workforce

Off-shore workforce

OSK Research


12

12

and above, medium-sized players (such as BAB) bidding for jobs worth USD300m to USD750m, and the

smaller players, which are active in smaller projects of USD150m to USD300m. BAB distinguishes itself

from its competitors as it is able to develop local capability, provide a full range of services, is reliable and

has shown technical excellence throughout its projects. Its lower cost base compared to its European

competitors allows it to realize higher margins while offering competitive pricing. In the next decade, we

believe that BAB’s focus in this multi-billion industry will contribute to its growth story as the industry is

expected to be at the epicenter of the offshore O&G industry.

Figure 27: Peer comparison in FPSO segment

Source: OSK, Bloomberg, Prospectus

Figure 28: Global floating platform installations (units) by floater type (2003-2010)

Figure 29: Estimated global floating platform installations (units) by floater type (2011-2020)



Local OSV competitors. There are low barriers to entry in the OSV market, in which the competition is

intense and where there is an oversupply. To address these concerns, BAB embarked on a fleet

expansion programme, namely “Steel on Water” in 2006, under which it boosted its fleet to over 40 OSVs.

Its vessel deployment footprint from its country of origin to over 10 countries in Asia, Africa and Latin

America is a testament of the group’s technical advantage in this industry. In Malaysia, BAB considers

Alam Maritim as its closest competitor in terms of services offered. Other than Alam, there are 2 other

listed companies competing in the same industry i.e Petra Perdana and Tanjung Offshore. We prefer BAB

for its technical edge and cross border capabilities, coupled with its strong reputation in the industry.

South-East Asia’s OSV competitors. According to BAB’s prospectus, there are an estimated 500 or

more vessels in South-East Asia alone, with more than 5 providers based in Singapore. The major

competitors that are comparable to BAB are Swire Pacific Limited, PACC Offshore Services Holdings Pte

Ltd, Ezra Holdings and Jaya Holdings Limited, which are the largest OSV providers in terms of size of

fleet and market presence. All these competitors offer a full range of OSV services but we believe they

are competing for the larger operations and projects.

Company Bloomberg Mkt Cap PER FY1 PER FY2 No. of FPSOs

Ticker (USD'm) (x) (x) (units)

Maersk-AP Moller MAERSKB DC 38964.3 9.6 7.9 3

MISC Berhad MISC MK 11611.3 33.1 19.8 5

SBM Offshore NV SBMO NA 3779.5 13.6 11.9 11

Bumi Armada Berhad BAB MK 3076.7 22.6 15.5 3

Fred Olsen FOE NO 2915.6 6.2 6.2 3

Teekay TK US 2414.1 0.0 40.1 4

BW Offshore Ltd BWO NO 1901.8 13.2 9.5 13

Modec Inc 6269 JP 818.1 17.2 13.8 10

Sevan SEVAN NO 580.3 0.0 3.0 2

Average 12.8 14.2

FPSO, 46%

FSO, 25%

FSU, 2%

Other Floater, 3%

Spar, 5%

TLP, 5%

Semi-Sub, 7%

FPS, 7%

FPSO, 58%

FSO, 11%

FSU, 1%

Other floater, 2%

Spar, 4%

TLP, 8%

Semi-Sub, 10%

FPS, 6%

OSK Research


13

13

Figure 30: Peer comparison in the OSV segment

Source: OSK, Bloomberg, Prospectus

Figure 31: South-East Asia’s current and future newbuild OSVs from 1970-2015


Company Bloomberg Mkt Cap PER FY1 PER FY2 No. of OSVs

Ticker (USD'm) (x) (x) (units)

Swire Pacific Offshore 19 HK 23752.4 16.1 13.0 70

Bumi Armada Berhad BAB MK 3076.7 22.6 15.5 43

Ezra EZRA SP 867.5 14.5 10.1 33

Nor Offshore NOR NO 758.3 0.0 9.4 6

Otto OTML SP 515.5 10.2 9.0 6

Tanjung Offshore TOFF MK 458.1 27.5 13.6 9

Swiber SWIB SP 400.0 8.8 6.6 19

Jaya JAYA SP 372.0 5.4 6.9 19

CH Offshore Ltd CHO SP 267.4 7.3 6.7 18

Alam Maritim AMRB MK 251.2 13.5 9.6 37

Chuan Hup CH SP 177.2 0.0 0.0 7

Petra Perdana PETR MK 155.0 24.7 10.6 30

Swissco SWCH SP 108.5 0.0 0.0 27

Sealink SELI MK 103.1 8.7 7.4 18

Average 11.4 8.5

OSK Research


14

14

Figure 32: Peer comparison in the T&I segment

Source: OSK, Bloomberg

THE FINANCIALS

FPSO still the main revenue driver. Although we expect BAB’s other businesses to grow in tandem with

its aim to be a 1-stop solution provider, we believe that its FPSO revenue will remains the key revenue

driver, contributing 40%-50% of total revenue going forward. This is based on our assumption of 5 FPSOs

over the next 2 years. But the company secures more new FPSO contracts in the upcoming months, this

revenue contribution could rise to above 50%. Also, the take-up for FPSOs is higher compared to that for

OSVs due to the scarcity of such vessels in the market. As for its T&I business, revenue may be one-off

or less recurring but we still anticipate this division growing in line with the expected growth in the number

of new platforms in the global market.

Figure 33: Revenue breakdown by business segment

Source: OSK

Figure 34: EBITDA, PAT and NP margins

Source: OSK

Company Bloomberg Mkt Cap PER FY1 PER FY2

Ticker (USD'm) (x) (x)

Technip TEC FP 10253.2 18.6 15.5

Offshore Oil Engineering 600583 CH 4780.9 43.0 23.7

Bumi Armada Berhad BAB MK 3076.7 22.6 15.5

Sapuracrest Petroleum Bhd SCRES MK 1537.2 18.8 16.1

Global Industried Ltd GLBL US 798.5 0.0 12.6

Willbros Group WG US 470.1 0.0 12.8

Anhui Tianda Oil Pipe Co 839 HK 355.0 8.0 5.2

Average 15.8 14.5

-

200.0

400.0

600.0

800.0

1,000.0

FY08 FY09 FY10 FY11f FY12f

RM'm

FPSOs OSVs T&I Others

0%

10%

20%

30%

40%

50%

60%

70%

FY08 FY09 FY10 FY11f FY12f

EBITDA

PBT

NP

OSK Research


15

15

Attractive EBITDA margin at over 50%. BAB is able to generate both PAT and NP margins of close to

30% which is commendable compared to its other peers due to its technical competence in operation and

maintenance, which in turn gives it a cost advantage over its competitors. Its biggest cost driver is vessel

depreciation, which makes up about 30% of its total costs, followed by crew cost, accounting for about 15-

17% of its total costs.

Strong firm contract period orderbook of RM5.8bn, with optional extension period on RM2.5bn.

The existing firm contract period order is expected to keep the company busy over the next 2-3 years. Of

course, this value is expected to increase in tandem with the recovery in the global economy and rising

crude oil price.

Existing FPSO orderbook of RM3.5bn. At the group’s analyst briefing, BAB said its FPSO orderbook

has reached about RM3.5bn and upon expiry of these contracts, certain contracts contain extension

options which are renewable on an annual basis, with a total potential contract sum of RM1.6bn over the

entire option period. The charters for FPSOs such as Armada Perkasa and Armada Perdana may be

extended for additional one-year periods over a 5-year period each while Armada Perwira’s may be

extended for one-year periods over an 8-year period. The extension options are exercisable at the

discretion of BAB’s clients.

Existing OSV orderbook of RM880.9m. The orderbook of BAB’s OSV division is minimal at only

RM880.9m, or 7.8% of its firm orderbook. Its optional extension options which are renewable bear a

potential contract sum of RM919.1m. Again, we see this division taking the role of supporting its FPSO

and T&I activities rather than operating on a standalone basis.

Existing T&I orderbook of RM1.34bn. This amount is only expected to expire by 2018.

5 FPSO projects and others being tendered. At BAB’s analyst briefing, management guided that the

group is currently tendering for 5 FPSO projects, of which 2 are in Malaysia, 1 in Angola, 1 in Nigeria and

1 in Indonesia. Also, we gather that BAB will be tendering for some notable projects awaiting contract

award, including the development of the Government’s marginal oilfield initiatives. Based on the tone set

during the briefing, management appears quite confident in securing new contract awards moving

forward.

Figure 35: Firm contract period orderbook Figure 36: Optional extension period

orderbook

Source : OSK

Source : OSK

FPSORM3.5bn

61%

OSVRM0.9bn

15%

T&IRM1.4bn

24%

FPSORM1.6bn

64%

OSVRM0.9bn

36%

OSK Research


16

16

INVESTMENT HIGHLIGHTS

Higher oil prices to spur E&P spending. Crude oil price has broken past the USD70-USD80/barrel level

reached in 4Q10, spiking to USD114/barrel recently before easing to USD90-USD100/barrel recently.

Hence, stable but higher oil prices are expected to motivate the oil majors to increase their E&P spending,

which would eventually lead to higher demand for BAB’s FPSO, OSVs as well as T&I business.

Figure 37: Oil price broken USD70-USD80/barrel consolidation level in 4Q10


Global economic recovery equals higher energy demand. Besides the attractive oil price, the global

economic recovery would spur energy demand, resulting in heightening O&G activities to fulfill this

demand. Although Asia now leads the incremental increase in energy demand, we believe it would be a

matter of time before US and Europe start to catch up after weathering the global economic recession and

given to their large markets, we think their incremental demand would be equally high.

Industry moving towards 1-stop solutions. As O&G companies in the global market advance either

technologically or via new partnerships, their customers would accordingly be more demanding than

before. In fact, most of them would prefer to appoint a single O&G company as the main contractor and

shift the project delivery responsibility entirely to that company. This also allows them to manage their

costs better and reduces execution risks arising from delays in project coordination. Hence, BAB’s 3

combined core businesses would qualify it as a 1-stop solution provider and confer it a higher success

rate in bidding for new jobs compared to its peers which specialize only in 1 area.

Targeting a niche market. Of BAB’s 3 core businesses, FPSO is a niche business as there are very few

FPSO owners in the market due to the high capex required to own such vessels. Going forward, we

understand that BAB expects to further enlarge its FPSO fleet size and this business would be its core

earnings driven in the future.

Figure 38: Global FPSO players


0

20

40

60

80

100

120

140

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

USD/ barrel

0

2

4

6

8

10

12

14

BW Offshore LtdSBM Offshore NV Modec Inc MISC Bhd Teekay Bluewater Fred Olsen Maersk-AP Moller BAB Sevan

OSK Research


17

17

Strong orderbook and customer base. As we mentioned in the earlier sections, BAB is supported by

strong orderbook of RM5.8bn, which will keep the company busy over the next 2-3 years.

Bonding with customers. Having an experienced management team which is actively involved in

assessing customers’ needs is key to acquiring and retaining customers. BAB’s team members are

constantly updated on their clients’ development plans and focus their efforts in the right direction. In

addition, its ability to deliver quality services has enabled it to build a solid reputation and secure new

O&G support projects and contracts on a regular basis.

Active corporate branding. BAB understands the importance of branding and market awareness. Hence

the company constantly participates in industry seminars, conferences and trade fairs to create greater

visibility and awareness of its products and services. Recently, the company participated in the Nigeria Oil

and Gas Conference 2011 and Turkmenistan Oil & Gas Road Show 2011.

VALUATION AND RECOMMENDATION

Initiate with Subscribe/Buy recommendation. We are initiating coverage on BAB with a Subscribe/Buy

recommendation and our fair value for the company is RM3.65 based on our sum-of-parts valuation. This

is equivalent to a PER of 18x FY12 EPS, a valuation which we think is fair given the company’s sheer size

and its ability to provide 1-stop solutions starting from the O&G exploration to decommissioning stage.

Also, since an estimated more than 70% of its business provides recurring income and constant cash

flow, the stock deserves a premium valuation over other local O&G supporting companies, who are

dependent on one-off jobs. We are initiating coverage on BAB with a BUY recommendation.

Figure 39: Peer valuation

Source: OSK

Figure 40: Local peer valuation


Business Segment Ratio FY12 EPS Valuation FV

FPSOs 50% 10.1 DCF 2.18

OSVs 25% 5.1 16 0.81

T&I 15% 3.0 15 0.46

Others 10% 2.0 10 0.20

100% 20.3 3.65

OSK Research


18

18

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f

Turnover 519.8 732.1 1241.4 1559.3 2096.2

EBITDA 301.8 480.3 715.6 873.2 1173.9 PBT 161.8 283.9 383.3 444.6 645.1 Net Profit 150.0 277.4 351.8 409.0 593.5

EPS (sen) 5.1 9.5 12.0 14.0 20.3 DPS (sen) 0.0 0.0 0.0 4.0 6.0

Margin EBITDA (%) 58.1 65.6 57.6 56.0 56.0

PBT (%) 31.1 38.8 30.9 28.5 30.8 Net Profit (%) 28.9 37.9 28.3 26.2 28.3

ROE (%) 34.8 41.4 40.2 23.7 27.0

ROA (%) 6.2 7.2 7.3 5.9 7.2 Balance Sheet

Fixed Assets 2147.4 3173.2 4026.4 5460.5 6871.4 Current Assets 287.3 689.0 769.0 1439.1 1405.7 Total Assets 2434.7 3862.3 4795.5 6899.6 8277.2

Current Liabilities 664.8 1285.1 1897.9 2549.5 3052.9 Net Current Assets -377.5 -596.0 -1128.8 -1110.4 -1647.2

LT Liabilities 1338.5 1905.8 2022.5 2622.9 3022.9 Shareholders Funds 431.3 671.3 875.1 1727.2 2201.3 Net Gearing (%)

Gearing Gearing Gearing Gearing Gearing

EARNINGS FORECAST

OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.

Distribution in Singapore

This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to "Institutional Investors", "Expert Investors" or "Accredited Investors" as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd ("DMG").

All Rights Reserved. No part of this publication may be used or re-produced without expressed permission from OSK Research. Published and printed by :-

OSK RESEARCH SDN. BHD. (206591-V) (A wholly-owned subsidiary of OSK Investment Bank Berhad)

Chris Eng

Kuala Lumpur Hong Kong Singapore

Malaysia Research Office

OSK Research Sdn. Bhd.

6th

Floor, Plaza OSK

Jalan Ampang

50450 Kuala Lumpur

Malaysia

Tel : +(60) 3 9207 7688

Fax : +(60) 3 2175 3202

Hong Kong Office

OSK Securities

Hong Kong Ltd.

12th

Floor,

World-Wide House

19 Des Voeux Road

Central, Hong Kong

Tel : +(852) 2525 1118

Fax : +(852) 2810 0908

Singapore Office

DMG & Partners

Securities Pte. Ltd.

10 Collyer Quay

#09-08 Ocean Financial Centre

Singapore 049315

Tel : +(65) 6533 1818

Fax : +(65) 6532 6211

Jakarta Shanghai Phnom Penh

Jakarta Office

PT OSK Nusadana Securities

Indonesia

Plaza CIMB Niaga, 14th

Floor,

Jln. Jend. Sudirman Kav 25,

Jakarta Selatan 12920

Indonesia

Tel : (6221) 2598 6888

Fax : (6221) 2598 6777

Shanghai Office

OSK (China) Investment

Advisory Co. Ltd.

Room 6506, Plaza 66

No.1266,West Nan Jing Road

200040 Shanghai

China

Tel : +(8621) 6288 9611

Fax : +(8621) 6288 9633

OSK Indochina Securities Limited

No. 263, Ang Duong Street (St. 110),

Sangkat Wat Phnom, Khan Daun

Penh,

Phnom Penh, Cambodia.

Tel: (855) 2399 2833

Fax: (855) 2399 1822

bumi armada ipo focus

Documents