Investment Highlights

• We maintain our HOLD recommendation on Bumi Armada with a lower fair value of RM0.20/share (from an earlier RM0.30/share), based on a higher 30% discount to our sum-of-parts of RM0.33/share given the unresolved US$380mil (RM1.6bil) shortterm loan repayment against the backdrop of an additional debt repayment of RM926mil scheduled for this year.

• We highlight the elevated risks of a highly dilutive equity-raising exercise in the near-term with Bumi being the only bidder in the JV with Shapoorji Pallonji Oil & Gas for ONGC’s KG-DWN 98/2 deepwater project.

• Nevertheless, management indicated that the group does not expect any equity capital required for this project, which could mean transferring an existing idle floating, production, storage and offloading vessel (FPSO) such as Armada Claire into the JV structure while its partner contribute the conversion costs.

• Meanwhile, management has not revealed any progress on its plans for asset securitization via partial divestments of its whollyowned FPSO Olombendo, which has achieved full acceptance and is operating as expected.

• The negotiations with Bumi’s financiers have been extended from 1QFY19 to next quarter, which appears uncertain to us even though management has expressed confidence in reaching a resolution.

• A key issue remains the operational uptime for the FPSO Kraken, which continues to be adversely affected by technical issues since achieving first oil in June 2017. With this leading to lower charter revenue, we remain uncertain whether management is able to fully resolve these issues, which could translate to further impairments this year.

• Excluding impairments of RM2.5bil for the FPSO Kraken, offshore support vessels and trade receivables, the group’s core net profit of RM217mil was above our forecast but within consensus. However, given that the group continues to be buffeted by Kraken’s weak operational delivery, we maintain our FY19F– FY20F earnings, which are 30%–50% below consensus. The group did not declare any dividend as expected due to the all-in losses.

• Bumi Armada’s 4QFY18 revenue declined 2% QoQ to RM576mil mainly due to lower charter rates from Armada TGT’s extension option from August 2018 and lower revenue from Armada Kraken, which is still suffering from technical glitches.

• Together with a 6ppt QoQ decline in OSV utilisation rate to 38%, this contributed to the group’s 4QFY18 core net profit drop of 44% sequentially to RM34mil, partly offset by variation order recognised for the Lukoil.

• The group’s firm order book slid 4% QoQ to RM20.2bil, while extension options remained at RM10.3bil. Currently, the stock trades at a depressed FY19F PE of 7x against a backdrop of deteriorating balance sheet risks.

Source: AmInvest Research - 1 Mar 2019