Investment Highlights

• We have downgraded our recommendation on Bumi Armada to HOLD from BUY with lower fair value of RM0.30/share (from an earlier RM0.90/share), based on a 10% discount to our revised sum-of-parts of RM0.33/share.

• While the group has paid US$120mil of the US$500mil debt due in October 2018 for the Kraken floating production storage and offloading (FPSO) vessel, negotiations to extend the maturity profile for the remaining US$380mil term loan have been extended until early 1Q2019.

• Management did not utilise the group’s US$1.5bil Euro medium term note programme given by the same financial institutions under the current term loan, as its maturity deferment is still being negotiated.

• Alternatively, plans for asset securitization via partial divestments of its wholly-owned FPSO Olombendo, which has recently achieved full acceptance, are still being reviewed. As management has now moderated its view to consider a cash call, we highlight the rising risks of an equity-raising exercise in the near term, especially if the group manages to secure another FPSO charter.

• The group posted a surprise 3QFY18 impairment of RM563mil, which came from 70% of the group’s 44 offshore support vessels together with the loss from the sale of Armada Ulysses, which was earlier intended for an FSPO project. Together with Armada Kraken’s 2QFY18 penalties arising from different technical specifications determined in the contract amendment to mitigate Bumi Armada’s exposure to the client EnQuest’s claims, the group’s total 9MFY18 impairments surged to RM1bil.

• We have drastically slashed Bumi Armada’s FY19F net profit to just breakeven on lower margins from the FPSO and OSV segments amid expectations of a seasonally weaker 4QFY18 while the group’s 9MFY18 core net profit of RM2mil (excluding these one-off impairments) was grossly below expectations. The group did not declare any dividend as expected due to the losses.

• We have also cut FY19F-FY20F earnings by 47%-65% as the expected rebound from FPSO Kraken’s contribution from operating to finance lease after final acceptance on 4 September is likely to disappoint, partly offset by reduced contribution from Vietnam-based Armada TGT 1’s lower charter rates.

• Bumi Armada’s 3QFY18 revenue fell 10% QoQ to RM588mil mainly due to lower charter rates from Armada TGT from 3 August 2018, a one-off 2QFY18 variation order from Armada Olombendo and the completion of Armada Installer’s Turkmenistan work scope in June this year amid lower OSV charter rates albeit a 5ppt rise in vessel utilisation rates to 44%. However, the group’s 3QFY18 core net profit surged 5.6x QoQ to RM61mil on a one-off compensation from the Kraken charter amendment which was finalised in 2QFY18.

• The group’s order book slid 2% QoQ to RM31bil, of which 67% comprise firm charters. Currently, the stock trades at an unexciting FY19F PE of 13x against a backdrop of deteriorating balance sheet risks.

Source: AmInvest Research - 23 Nov 2018