KUALA LUMPUR: Bumi Armada Bhd is well-positioned to generate stable cash flows from long-term charter contracts for floating production storage and offloading (FPSO) that has extension options.
Mercury Securities Sdn Bhd in a note said the offshore energy facilities and services provider's large order book at RM15.8 billion would also provide earnings visibility over the medium to long term.
"We estimate Bumi Armada will generate free cash flow of RM780.9 million and RM880.5 million in the financial year ending December 31, 2021 (FY21) and FY22 respectively, giving the stock a forward price/free cash flow ratio of 3.24 times," it said in a research note.
Mercury Securities said Bumi Armada's future projects in the pipeline include the Kakinada FPSO charter contract awarded to its 30:70 joint-venture (JV) with Shapoorji Pallonji Oil & Gas, which could also be extended for an additional seven years with an aggregate value of US$655.0 million.
The firm also noted that Bumi Armada is likely on a stable footing due to strong oil prices, dilution risk of unscheduled termination of charter contracts and the improved probability of refinancing debt at acceptable terms.
"We have a Buy recommendation on Bumi Armada with a target price of 58 sen per share derived from a forward price-earnings (PE) of 10 times and FY21 earnings per share 5.8 sen, representing a 34.9 per cent gain over the current price.
"We think that a higher PE of 10 times is justified due to strong free cash flow and the high oil price environment."
Among the risk factors include unplanned downtime for its FPSOs and defaults by customers on their contractual payments will negatively impact the financial position of the company.
Meanwhile, it said Bumi Armada's level of indebtedness was rather high with a net gearing of 2.1 times as at the end first quarter of 2021.
"However we expect the company will be able to successfully refinance its debt due to its strong free cash flow profile."
According to Westwood Global Energy Group, 14 additional FPSOs would become available in 2022 if no extension options are exercised, adding to the 16 units currently awaiting upgrade or redeployment.
Westwood, however, expected up to 17 floating production systems awards in 2021 which would alleviate potential oversupply conditions.