Investment Highlights

• We maintain our HOLD recommendation on Bumi Armada with an unchanged fair value of RM0.20/share, based on a 30% discount to our sum-of-parts of RM0.33/share.

• The discount stems from the lingering possibility of a dilutive equity-raising exercise against a backdrop of a heavily geared balance sheet, despite a RM3.1bil short-term debt likely to be reclassified to long-term debt in 2QFY19, following the waiver from financiers on the FPSO Kraken’s final acceptance delay and breach of sukuk financial covenants.

• Our forecasts are unchanged as the group’s 1QFY19 core net profit of RM62mil was generally in line with forecasts, accounting for 27% of our FY19F earnings and 26% of consensus. As a comparison, the group’s 1Q accounted for 28%–38% of core earnings over the past 2 years. Additionally, the group did not declare any dividend, as expected.

• We expect the group to register softer earnings in the subsequent quarters given that the group’s interest rate has risen by 2ppts on a US$660mil (RM2.7bil) refinanced term loan since 23 May this year. Management is unable to provide clarity on Armada Kraken fully achieving the client Enquest’s contracted production targets while the group’s construction vessels could be idle in the Caspian Sea this year since December last year, unless additional work scope can be secured from Lukoil.

• Bumi Armada’s 1QFY19 revenue declined 15% QoQ to RM492mil mainly due to the completion of Lukoil’s offshore construction work in December last year, which was partly offset by a 12% rise from the floating production offshore segment with the increase in Armada Kraken’s oil production.

• The higher Kraken revenue together with absence of impairments caused the group’s core net profit to surge 82% to RM62mil. However, the group’s firm order book slid 4% QoQ to RM19.3bil, while extension options slipped 5% to RM9.8bil, which has yet to include the recent ONGC charter.

• For the group’s JV with Shapoorji Pallonji Oil & Gas (Shapoorji) to provide an FPSO vessel to ONGC for the ONGC NELP Block KG-DWN 98/2 Development Project Cluster-II field off Kakinada, India, we estimate that a capex of US$1.3bil, 30% equity stake and debt-to-equity financing ratio of 80:20 will mean that the group will need to raise additional equity financing of RM327mil. This appears uncertain given that Bumi Armada has just recently refinanced unsecured term loan and revolving credit facilities.

• Hence, the likelihood of a dilution from an equity-raising exercise remains elevated given Bumi’s high FY19F net debt/EBITDA of 9.1x vs. Yinson’s 2.9x. The group intends to dispose of idle OMS assets while a 40% sale in the fully operational US$1.5bil Olombendo FPSO could secure US$275mil (RM1.1bil) cash, assuming a project IRR of 11%. However, it will only cut Bumi’s net debt/EBITDA to 7.9x, which remains elevated against its peers. As such, the stock trades at a depressed FY19F PE of 5x currently.

Source: AmInvest Research - 27 May 2019