PP10551/09/2011 (028936) 07 Jul 2011

MALAYSIA EQUITY Investment Research Daily

IPO Note
Jason Yap +60 (3) 9207 7698 jason.yap@my.oskgroup.com

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.

SUBSCRIBE
Fair Value IPO Price RM3.65 RM3.15

OIL & GAS

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%

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 BABs next FPSO project, will service Apache Jilimar Pty Ltd in Australia. The groups 5 th 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 groups 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

IPO Details Public Issue: - Institutional offering - Retail offering Offer for sale Total

Shares (m) 564.4 79.8 234.3 878.5

Utilisation of Proceeds Repayment of bank borrowings Capital expenditures Working capital Listing expenses Total

RMm 775 592 562 100 2,029

FYE Dec (RMm)

Revenue Net Profit % chg y-o-y Consensus EPS (sen) DPS (sen) Dividend yield (%) ROE (%) ROA (%) PER (x) BV/share (RM) P/BV (x) EV/ EBITDA (x)

FY08
519.8 150.0 5.1 0.0 34.8 6.2 61.5 0.19 16.7 41.0

FY09
732.1 277.4 85.0 9.5 0.0 41.4 7.2 33.2 0.29 10.7 25.7

FY10
1241.4 351.8 26.8 12.0 0.0 40.2 7.3 26.2 0.38 8.2 17.3

FY11f
1559.3 409.0 16.3 14.0 4.0 1.3 23.7 5.9 22.6 0.76 4.2 14.2

FY12f
2096.2 593.5 45.1 20.3 6.0 1.9 27.0 7.2 15.5 0.96 3.3 10.5

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

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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
Shareholders Number of Shares m 29.3 29.3 21.3 %

Retail Offering - Bumiputera - Non-Bumiputera - Directors and eligible employees Institutional Offering Bumi investors approved by MITI Other Malaysian and foreign institutional and selected investors Total
Source: OSK, Prospectus

3.3% 3.3% 2.4%

336.8 461.9 878.5

38.3% 52.6% 100

Figure 2: Indicative timetable

Date 28-Jun-11 30-Jun-11 7-Jul-11 7-Jul-11 11-Jul-11 11-Jul-11 19-Jul-11 21-Jul-11

Opening of the Institutional Offering Opening of the Retail Offering Closing of the Retail Offering Closing of the Institutional Offering Price Determination Date Balloting of applications for the Issue Shares offered under the Retail Offering Allotment/Transfer of the Issue Shares/Offer Shares to successful applicants Listing
Source: OSK, Prospectus

Figure 3: Breakdown of utilization of listing proceeds

Details of utilisation Estimated timeframe for utilisation upon listing RM'm

Repayment of bank borrowings Capital expenditures Working capital Estimated listing expenses Total

Within 6 months Within 24 months Within 24 months Within 3 months

775 592 562 100 2,029

Source: OSK, Prospectus

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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 Malaysias 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 1987 Dec 1995 Jun 1997 Apr 2003 2006 2007 2008 2009

Established Bumi Armada Navigation Sdn Bhd (BAN) Established Haven Automation Industries Sdn Bhd (Haven) Incorporated BAB as a public company, organised under 2 main business units, namely BAN and Haven Listed BAB on the then Main Board of KLSE (now the Main Market) Delisted company from the Main Market Launched OSV (Offshore Support Vessel) fleet expansion programme, referred to as 'Steel on Water' Secured contract for their first FPSO (Floating production, storage and offloading system), the Armada Perkasa The Armada Perkasa commenced operations for Afren in the Okoro-Setu Field, Nigeria Second FPSO, the Armada Perdana becomes operational Chartered their third FPSO, the Armada Perwira which will be fully operational in 3QFY11 Acquired their fourth FPSO, the Armada Prima Secured a conditional letter for Armada Prima with Apache Jilimar Pty Ltd for the Balnaves development in Australia

2010 Mar 2011

Source: OSK, Prospectus

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GROUP STRUCTURE
Figure 5: BABs corporate structure

Business Units

Support Units

Floating Production Storage and Offloading (FPSO) 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

Offshore Support Vessels (OSV)

Transport and Installation Service (T&I)

Oilfield Services (OFS)

Engineering, Procurement and Construction (EPC) 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

Fleet Management Services (FMS)

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

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

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

Source: OSK, Prospectus

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

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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 Hassans 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 Bhds (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 BABs 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 Australias 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 Malaysias most experienced players in the OSV segment and is mainly responsible for BANs performance. He is also one of the pioneers of BABs 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 Italys University of Pisa. Figure 6: Summary of BABs key management
Name Hassan Assad Basma Shaharul Rezza bin Hassan Andrew Day Lamshed Wee Yam Khoon Massimiliano Bellotti Adriaan Petrus Van De Korput Madhusudanan Madasery Balan Jonathan Edward Duckett Noor Azmi bin Abdul Malek Noval D'avila Paredes Choong Guan Huat Age 54 39 49 56 42 53 46 41 46 48 58 Designation/Function Chief Executive Officer Chief Financial Officer Senior Vice President, Floating Production Systems Senior Vice President, OSV Senior Vice President, T&I Senior Vice President, Projects Chief Talent Officer Senior Vice President, Corporate Planning Vice President, BAE Vice President, Corporate Health Safety Environment Quality ("HSEQ") Vice President, Strategic Procurement

Source: OSK, Prospectus

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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 companys 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. BABs 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: BABs participation in the offshore field lifecycle
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 Decommissioning Removal of installations

FPSO
Business Units

OSV T&I OFS

Support Units

FMS EPC

Source: OSK, Prospectus

Figure 8: FY09 revenue breakdown

FPSOs 45%

Figure 9: FY10 revenue breakdown

T&I 22% FPSOs 44%

OSVs 55%
OSVs 34%

Source : OSK, Prospectus

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 companys key focus as FPSO contracts provide stable and recurring cash for the offshore business.

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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 Governments 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). BABs 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). BABs 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 companys 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.

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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 Nigerias 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 Singapores 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.Vs (ENI) subsidiary, Nigerian Agip Exploration Ltd (NAE) in Nigerias 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 companys fourth vessel, Armada Prima (formerly known as Griffin Venture) was acquired in December 2010 as a conversion candidate for BABs 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 Indias 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 BABs FPSOs

2007 Armada Perkasa Armada Perdana Armada Perwira 2010 Nigeria: Afren 2008-2013 (2018) Nigeria: NAE 2009-2014 (2019) Vietnam: HLKOC 2011-2018 (2026) 2015 2020

Firm Period

Option Period

Source: OSK, Prospectus

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OSV business unit. As the principal contributor to the group, BABs 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
USD per bhp per day $4.0 USD3.57 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $2008 2009 2010 USD1.15 USD1.22 1.32 USD2.82 USD3.85

Figure 16: AHTS and average utilization rate

Year 2010 2009 2008

Utilisation Rate (%) No. of OSVs 65.7 23 86.9 18 95.1 14

Source : OSK, Prospectus

Source : OSK, Prospectus

Figure 17: Accommodation workboat/barges Figure 18: Accommodation workboat/barge daily charter rates and average utilization rate
USD per bed per day $300 USD257.50 $250 $200 $150 $100 $50 $2008 2009 2010 USD58.43 USD63.92 USD63.92 USD257.50

USD174.59

Year 2010 2009 2008

Utilisation Rate (%) No. of OSVs 80.0 8 91.2 8 91.1 6

Source : OSK, Prospectus

Source : OSK, Prospectus

Figure 19: Other OSVs daily charter rate range

USD per unit per day $7,000.0 $6,000.0 $5,000.0 $4,000.0 $3,000.0 $2,000.0 $1,000.0 $USD569 2008 USD534 2009 2010 USD1076 USD6902

Figure 20: Other OSVs and average utilization rate

USD5628 USD5000

Year 2010 2009 2008

Utilisation Rate (%) No. of OSVs 73.4 9 61.9 19 85.2 16

Source : OSK, Prospectus

Source : OSK, Prospectus

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Figure 21: Summary of vessels owned by BABs OSV business unit

Vessel Type AHTS/AHT Accommodation workbarge/workboats Mooring launch Standby vessel SSV Utility vessels Others Total No. of vessels 25 8 3 1 2 2 2 43

Source: Prospectus

T&I business unit. BABs T&I segment only commenced operation in 2010. This segments 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 Nigerias 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. BABs top customers are NAE, Afren, Petronas Group and HLJOC, which together contributed 10% or more to the groups 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 BABs FPSO and OSV business to grow in tandem with its growth plan.

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Figure 24: Top customers contributions in the FPSO and OSV business
RM'm 250.0

200.0 Petronas 150.0 100.0 50.0 0.0 FY08

Source : OSK, Prospectus

NAE Afren
HLJOC

FY09

FY10

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 BABs 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 companys requirements. With such a huge workforce, it is not surprising that the labor cost has been accounting for about 20% of BABs total cost of sales since FY08. Figure 25: BABs workforce (no. of staffs) Figure 26: BABs workforce (%)

Workforce category On-shore workforce Off-shore workforce

As at 1-Jun-11 464 1577

23% On-shore workforce 77%

Off-shore workforce

Source : OSK, Prospectus

Source : OSK, Prospectus

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

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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 BABs 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
Company Bloomberg Ticker MAERSKB DC MISC MK SBMO NA BAB MK FOE NO TK US BWO NO 6269 JP SEVAN NO Mkt Cap PER FY1 (USD'm) (x) 38964.3 11611.3 3779.5 3076.7 2915.6 2414.1 1901.8 818.1 580.3 Average 9.6 33.1 13.6 22.6 6.2 0.0 13.2 17.2 0.0 12.8 PER FY2 No. of FPSOs (x) (units) 7.9 19.8 11.9 15.5 6.2 40.1 9.5 13.8 3.0 14.2 3 5 11 3 3 4 13 10 2

Maersk-AP Moller MISC Berhad SBM Offshore NV Bumi Armada Berhad Fred Olsen Teekay BW Offshore Ltd Modec Inc Sevan

Source: OSK, Bloomberg, Prospectus

Figure 28: Global floating platform Figure 29: Estimated global floating platform installations (units) by floater type (2003-2010) installations (units) by floater type (2011-2020)
FPS, 7% Semi-Sub, 7%
Semi-Sub, 10% FPS, 6%

TLP, 5%
TLP, 8%

Spar, 5% FPSO, 46% Other Floater, 3% FSU, 2%

Spar, 4% Other floater, 2% FSU, 1% FPSO, 58%

FSO, 11%

FSO, 25%

Source : OSK, Prospectus

Source : OSK, Prospectus

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 groups 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 Asias OSV competitors. According to BABs 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.

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

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Figure 30: Peer comparison in the OSV segment

Company Bloomberg Ticker 19 HK BAB MK EZRA SP NOR NO OTML SP TOFF MK SWIB SP JAYA SP CHO SP AMRB MK CH SP PETR MK SWCH SP SELI MK Mkt Cap PER FY1 (USD'm) (x) 23752.4 3076.7 867.5 758.3 515.5 458.1 400.0 372.0 267.4 251.2 177.2 155.0 108.5 103.1 Average 16.1 22.6 14.5 0.0 10.2 27.5 8.8 5.4 7.3 13.5 0.0 24.7 0.0 8.7 11.4 PER FY2 (x) 13.0 15.5 10.1 9.4 9.0 13.6 6.6 6.9 6.7 9.6 0.0 10.6 0.0 7.4 8.5 No. of OSVs (units) 70 43 33 6 6 9 19 19 18 37 7 30 27 18

Swire Pacific Offshore Bumi Armada Berhad Ezra Nor Offshore Otto Tanjung Offshore Swiber Jaya CH Offshore Ltd Alam Maritim Chuan Hup Petra Perdana Swissco Sealink

Source: OSK, Bloomberg, Prospectus

Figure 31: South-East Asias current and future newbuild OSVs from 1970-2015

Source: OSK, Prospectus

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

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Figure 32: Peer comparison in the T&I segment

Company Bloomberg Ticker TEC FP 600583 CH BAB MK SCRES MK GLBL US WG US 839 HK Mkt Cap (USD'm) 10253.2 4780.9 3076.7 1537.2 798.5 470.1 355.0 Average PER FY1 (x) 18.6 43.0 22.6 18.8 0.0 0.0 8.0 15.8 PER FY2 (x) 15.5 23.7 15.5 16.1 12.6 12.8 5.2 14.5

Technip Offshore Oil Engineering Bumi Armada Berhad Sapuracrest Petroleum Bhd Global Industried Ltd Willbros Group Anhui Tianda Oil Pipe Co

Source: OSK, Bloomberg

THE FINANCIALS
FPSO still the main revenue driver. Although we expect BABs 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
RM'm 1,000.0
800.0

600.0 400.0 200.0 FY08

Source: OSK

FY09
FPSOs OSVs

FY10
T&I Others

FY11f

FY12f

Figure 34: EBITDA, PAT and NP margins

70% 60% 50% 40% 30% 20% 10% 0%
FY08 FY09 FY10 FY11f FY12f
EBITDA PBT NP

Source: OSK

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

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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 1517% 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 groups 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 Perwiras may be extended for one-year periods over an 8-year period. The extension options are exercisable at the discretion of BABs clients. Existing OSV orderbook of RM880.9m. The orderbook of BABs 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 BABs 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 Governments 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

T&I RM1.4bn 24%

OSV RM0.9bn 36%

OSV RM0.9bn 15%

FPSO RM3.5bn 61%

FPSO RM1.6bn 64%

Source : OSK

Source : OSK

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

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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 BABs FPSO, OSVs as well as T&I business. Figure 37: Oil price broken USD70-USD80/barrel consolidation level in 4Q10
USD/ barrel

140 120
100 80 60 40 20 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Source: OSK, Bloomberg

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, BABs 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 BABs 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
14

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10

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

Source: OSK, Bloomberg

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

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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. BABs 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 companys 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
Business Segment FPSOs OSVs T&I Others Ratio 50% 25% 15% 10% 100% FY12 EPS Valuation 10.1 DCF 5.1 16 3.0 15 2.0 10 20.3 FV 2.18 0.81 0.46 0.20 3.65

Source: OSK

Figure 40: Local peer valuation

Source: OSK, Bloomberg

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

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EARNINGS FORECAST

FYE Dec (RMm) Turnover EBITDA PBT Net Profit EPS (sen) DPS (sen) Margin EBITDA (%) PBT (%) Net Profit (%) ROE (%) ROA (%) Balance Sheet Fixed Assets Current Assets Total Assets Current Liabilities Net Current Assets LT Liabilities Shareholders Funds Net Gearing (%)

FY08 519.8 301.8 161.8 150.0 5.1 0.0

FY09 732.1 480.3 283.9 277.4 9.5 0.0

FY10 1241.4 715.6 383.3 351.8 12.0 0.0

FY11f 1559.3 873.2 444.6 409.0 14.0 4.0

FY12f 2096.2 1173.9 645.1 593.5 20.3 6.0

58.1 31.1 28.9 34.8 6.2

65.6 38.8 37.9 41.4 7.2

57.6 30.9 28.3 40.2 7.3

56.0 28.5 26.2 23.7 5.9

56.0 30.8 28.3 27.0 7.2

2147.4 287.3 2434.7 664.8 -377.5 1338.5 431.3 Gearing

3173.2 689.0 3862.3 1285.1 -596.0 1905.8 671.3 Gearing

4026.4 769.0 4795.5 1897.9 -1128.8 2022.5 875.1 Gearing

5460.5 1439.1 6899.6 2549.5 -1110.4 2622.9 1727.2 Gearing

6871.4 1405.7 8277.2 3052.9 -1647.2 3022.9 2201.3 Gearing

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

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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 a nd 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

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