MISC-Bumi Armada merger too difficult to pull off, says UOB Kay Hian

KUALA LUMPUR (July 10): A merger between MISC Bhd (KL:MISC) and Bumi Armada Bhd (KL:ARMADA) may be too difficult to pull off, UOB Kay Hian said on Wednesday, flagging potential stakeholder resistance and a lack of financial synergy.

Investors should continue to buy MISC as the stock is still undervalued, and take profit on Bumi Armada following the recent gain in its share price, UOB Kay Hian advised. The house also raised concerns about Bumi Armada over a lingering payment dispute for the Armada Sterling V vessel.

“While there are complementary areas and synergies, we believe the stumbling blocks for such a merger are too great,” UOB Kay Hian said.

Shares in Bumi Armada have risen more than 10% since The Edge’s report up to Tuesday. The stock has gained more than 21% so far this year, tracking broad gains in the energy sector amid elevated oil prices. MISC, meanwhile, has gained 18% year-to-date.

The Edge Malaysia weekly, in its July 8-14 issue, reported that MISC is in talks with Bumi Armada shareholders to acquire a substantial stake in Bumi Armada. If successful, the merger could create an entity rivalling Japan’s Modec Inc that now owns the most floating production, storage and offloading (FPSO) vessels.

Bumi Armada said that it is actively exploring investment opportunities that have the potential to add value to its shareholders. MISC said the company “continues to explore growth opportunities in its ordinary course of business”, though there is currently no development that would warrant a disclosure.

A merger that only involves the FPSO divisions of both companies could also encounter resistance from India’s Shapoorji Pallonji Energy, or SP Energy.

A key partner of Bumi Armada’s FPSO venture since 2014, SP Energy had recently “graduated from the piggy-back ride”, and is now a competitor to both MISC and Bumi Armada, UOB Kay Hian said.

Further, Bumi Armada’s Caspian Sea subsea vessels remain loss-making, making it a key drag for any potential acquirer, the research house said.

The potential resistance “may make the whole exercise futile”, UOB Kay Hian warned.

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