Russian risks manageable; Cameia upside
? Upgrade to Add from Hold, with an unchanged SOP-based TP of 55 sen, due
to the significant drop in share price on concerns over Russia.
? But BAB has already received in Malaysia proceeds from the sale of its
vessels to Lukoil and the ongoing pipelay contract with Lukoil is not material.
? Rerating catalysts include a Russia-Ukraine peace deal that could ease
investor concerns, and a potential contract win from an Angola FPSO bid.
Significant de-rating likely on perceived Russian risks…
BAB’s share price has derated significantly in the past month, likely due to retail selling,
in our view, as institutional holdings in the stock are light. The main reason is the onset of
the Russia-Ukraine conflict (the share price fell 27% from 52 sen on 24 Feb 2022, the
day of the Russian invasion, to a low of 38 sen on 15 Mar), which caused concerns over
BAB’s exposure in Russia. BAB has two subsea construction (SC) assets in the Caspian
Sea, i.e. the Armada Installer and Armada Constructor, that have worked for Russia’s
vertically-integrated oil company Lukoil up to Dec 2018, and which recently secured a
new contract to perform pipelay work for Lukoil that will begin in 2Q22F. Additionally,
BAB sold its three ice-class OSVs to Lukoil on 20 Jan 2022 for US$44.5m.
…but we think the risks are manageable
According to Bloomberg and Lukoil’s public filings, 28.33% of Lukoil’s shares are owned
by Alekperov Vagit Yusufovich, an Azerbaijani businessman and previously a Soviet
deputy oil and gas minister, and 9.3% is owned by Fedun Leonid, a Russian billionaire.
Another 43% of the shares are owned by institutional investors like Vanguard, Blackrock
and FMR. Lukoil is not owned by the Russian state and has not been subject to US or
European sanctions. Importantly for BAB, the US$44.5m proceeds from the sale of the
ice-class vessels have been remitted to Malaysia and used to pare down its corporate
borrowings. Also, the ongoing contract for the two SC vessels is not material to BAB, and
we believe that BAB has the right to claim for the costs of all preparatory work done todate even if the pipelay work is ultimately abandoned. We think that BAB will proceed
with the Lukoil work and that it may be possible to remit profits back to Malaysia via nonRussian banks’ continued access to the SWIFT payments systems. Hence, the risks
arising from the Russia-Ukraine war on BAB may be manageable, in our view.
Potential Cameia FPSO project win, but may entail rights issue
BAB is bidding for TotalEnergies’ Cameia FPSO project in Angola. If BAB wins the
c.US$1.8bn capex project in 2H22F, BAB may need to fork out equity of c.US$90m and
undertake a c.RM500m rights issue, in our estimate, assuming that 1) BAB takes a 50%
stake in the project; 2) TotalEnergies funds 42% of the capex; and 3) debt funding is 48%
of the capex. Tight FPSO contractor capacities globally suggest that day rates and IRRs
may be strong, and we would be positive if BAB wins the project. However, the downside
risk is that the rights issue may be negative for its share price in the immediate term.