the other 3 is just for name sake but cash flow is contolled by the Indians.. strip them off... hence BA trades at a discount to NTA..... now u know why NTA is not important... I prefer BAs NTA at zero... but cashflow strong...
4Q23 core net profit of RM313m was substantially above our RM177m estimate, because of stronger-than-expected operating performance by the FPSO Kraken after all the issues relating to its transformer failures in May 2023 were fully resolved in Aug 2023. Also, BAB settled in 4Q23 long-outstanding contractual issues with EnQuest (since 2016) over the technical performance of the FPSO Kraken, and this permitted BAB to record both higher revenues and reverse prior years’ cost provisions in 4Q23 amounting to a total of RM70m. The closure of the OSV division, after the last vessel was sold in 2Q23, also saved BAB RM20m in costs during 4Q23.
On the other hand, BAB reported a net loss of RM166m in 4Q23, which we did not expect. This arose from RM437m impairment against the FPSO Kraken, as well as a RM77m impairment against the net book value (NBV) of the two subsea construction vessels due to delays in securing new jobs caused by sanctions against Russia. The impairments were partially offset by RM36.4m in writebacks of prior years’ provisions of doubtful debts. The FPSO Kraken impairment was due to the NBV of the asset written down to its value in use (VIU); the latter is calculated as the discounted present value of future cashflows. We explain in detail the reasons for such an impairment on page 3, but emphasise that the contracted cashflows for the FPSO Kraken remain unchanged and therefore, our DCF value of the FPSO Kraken charter contract is not affected by the accounting, non-cash impairment. Trading in BAB shares is likely to be dominated by retail flows, in our view, and the average retail investor may find it difficult to understand the rationale for such an impairment; this caused BAB’s shares to plunge 11% yesterday after the lunchtime release of its FY23 results. In our view, this is an opportunity for investors to accumulate BAB shares for a potential short-term rebound.
The RM437m impairment against the FPSO Kraken was calculated as the difference between the NBV of the asset and the VIU, with the NBV written down to the lower VIU. For information purposes, if the VIU is higher than the NBV, the NBV is not adjusted higher; however, this is not applicable in the case of the FPSO Kraken. The FPSO Kraken’s NBV is based on the original cost of construction, depreciated on a straight line basis over 25 years to its assumed residual value of 2% of the original cost. The depreciation period of 25 years encompasses both the firm charter period of eight years and the option charter period of 17 years. The VIU is calculated as net present value (NPV) of the future bareboat charter (BBC) cashflows of the FPSO, and the VIU naturally declines with the passing of time because FPSO charter contracts have a finite life. FPSO charter contracts are also split into two distinct periods, i.e. the firm charter period, and the option charter period, with the firm period usually paying the FPSO owner a high daily BBC rate, with BBC rate in the option period typically at just 30% the firm period’s BBC rate (i.e. 70% lower). As such, VIUs of FPSO charter contracts would naturally be higher if the firm charter period has many more years remaining, and become lower once the FPSO contract enters into the option charter period due to the lower BBC rate in the option period. The VIUs of FPSO charter contracts also fluctuate depending on the discount rate applied to calculate the NPV, and higher global interest rates over the past two years would have put the VIUs under pressure, we believe. Specifically in relation to the FPSO Kraken, its eight-year firm charter period is nearing its end on 31 Mar 2025F, upon which the 17-year option charter period will commence at significantly lower BBC rates. Also, the discount rate applied by BAB for the VIU calculation at end-2023 was 8.5%, which BAB confirmed was higher than the rate used in previous years’ calculations. The combination of these factors caused the FPSO Kraken’s VIU at end-2023 to fall under its NBV, resulting in the RM437m impairment. BAB emphasised at the post-results analyst briefing that the contracted cashflows for the FPSO Kraken remain unchanged. Therefore, our DCF valuation of the FPSO Kraken, which is included in our SOP-based target price, is not affected by the accounting, non-cash impairment of RM437m in 4Q23. We have applied a cost of equity discount rate of 13% to discount future FPSO Kraken cashflows to equity (Figure 4). BAB also said that the FPSO Kraken impairments had nothing to do with the failure of transformer equipment on the FPSO in May 2023.
cashflows. This is potentially a near-term rerating catalyst. Other potential rerating catalysts include the FPSO Armada Sterling 5 (30% owned by BAB) securing final acceptance by the client, ONGC (ONGC IN, Not Rated) in the next few months. The FPSO received first oil at the Kakinada field, offshore India, on 7 Jan 2024, and is currently in the process of stabilising operations upon which it hopes to pass the ’72-hour’ test and then secure the certificate of final acceptance from ONGC. Once final acceptance is received, the FPSO can begin to receive its full contracted BBC rate, and the nine-year firm charter period can begin. At the moment, the FPSO is likely to be receiving a proportion of its full BBC rate, as it is producing oil (the first cargo offload was on 28 Feb 2024), in our view. However, ONGC will not pay the full BBC rate until final acceptance is secured by the FPSO. Meanwhile, a potential extension of the FPSO Armada TGT-1 charter from 14 Nov 2024F to 26 Aug 2031F, could add a further 15 sen to our SOP. A contract extension is currently being negotiated between BAB and the charterer Pharos Energy (PHAR LN, Not Rated). Separately, BAB said at the analyst briefing that it already received credit committee approvals from several banks to refinance the RM1.5bn sukuk borrowings which will be maturing on 4 Sep 2024F. Hence, the probability of a successful refinancing exercise is high, in our view. Downside risks include an unexpected decline in oil prices that may cause a pause in the pace of upstream FPSO capex spending by the oil majors and national oil companies, which could impact BAB’s growth prospects. BAB’s longer-term growth plans may also require equity funding in the medium term, leading to a potential rights issue, in our view.
looks like the worst may be over with most analyst saying higher operating cashflow per quarters...vs highlighting the impairment. the impairment is neutral
Trading in BAB shares is likely to be dominated by retail flows, in our view, and the average retail investor may find it difficult to understand the rationale for such an impairment; this caused BAB’s shares to plunge 11% yesterday after the lunchtime release of its FY23 results.
In our view, this is an opportunity for investors to accumulate BAB shares for a potential short-term rebound.
Separately, BAB said at the analyst briefing that it already received credit committee approvals from several banks to refinance the RM1.5bn sukuk borrowings which will be maturing on 4 Sep 2024F.
Thank you for the CIMB Raymond Yapp update, Mkt. I respect Raymond. He won the award for the best Oil and Gas Analyst. His endorsment means a lot. Greedy Gary, on the other hand, has no credibility with me. He is a manipulator. If he impairs, I suspect he does it for a personal benefit, rather than to actually reflects true value of the asset. In any case, he succeded in creating turmoil again. The good part is that stock will go up when he finally is kicked out.
Gabriel, thanks for the comprehensive explanation...Glad to see more robust and substantive discussions here instead of the shitty pot shots ...cheers!
Zonefinder, explanation is from Raymond Yapp. The O&G Analyst #1 from Singapore (before Malaysia). Grateful for Raymond to include and Mkt888 to provide link. The analysis from superficial bankers can be skipped.
my bad I was overly Conservative... wanted to buy closer to my last buying price at 48 and 49...anyway congrats to all those who bought and took the bear by its b*lls. let's see it break 63 soon.
Nick how do you interpret the last sentense of this from RHB e sizeable impairment on Armada Kraken caught us by surprise, and management explained that it was mainly due to the value-in-use (VIU) of this vessel falling significantly below its net book value (NBV) approaching the end of firm period (Mar 205), coupled with a hike in the discount rate in arriving at the VIU. It was highlighted that there has been no change to contracted cash flows and the recent transformer failure did not affect the VIU. BAB is currently in talks with the client on the potential extension and the renewal rate could be 50-70% lower than its firm contract. T
Gabriel, the least rate will drop by nearly 70%, that much is certain.
1. Per Enquest's last operational update: "The Group also expects unit margins to improve as the Kraken FPSO lease rate reduces by c. 70% from 1 April 2025, while the culmination of major projects at SVT will crystallise significant operating cost reductions and emission reductions in 2026 and beyond."
2. Basic calculation from the contract values:
Firm: USD1,400mil for 8yrs = USD175.00mil/annum Option: USD924mil for 17yrs = USD54.35mil/annum
54.35/175 = 31.1% (i.e. reduction of 68.9% which matches Enquest's statement)
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
rohank71
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Posted by rohank71 > 2 months ago | Report Abuse
BA has only 3 FPSO and not 7... that's where we are.