Investment Highlights

• We upgrade our recommendation on Bumi Armada to BUY from HOLD with a higher fair value of RM0.33/share (from an earlier RM0.20/share), by removing the 30% discount on our sum-ofparts of RM0.33/share given the group’s improving earnings and debt profile.

• While net gearing remains elevated at 2.7x, the group’s recent refinancing arrangement has extended repayments beyond its earlier short-term duration with the RM1.5bil sukuk bond being reclassified under long-term liability.

• The group is negotiating with its lenders for the RM1.6bil loan which was extended for the financing of Armada Kraken. This could enable the reclassification from short term to long term. The remaining short-term debt of RM1bil mostly involves project financing for FPSO vessels which will be progressively paid from their secured charters. Together with the plan to dispose of some of its FPSO stakes and idle OSV vessels, we view that the risk of an equity-raising exercise has receded.

• The group is also negotiating with financial institutions to project finance its 30% equity stake in the JV with Shapoorji Pallonji Oil & Gas (Shapoorji) to provide an FPSO vessel for ONGC’s NELP Block KG-DWN 98/2 Development Project Cluster-II field off Kakinada, India. Recall that the vessel could cost over US$1bil.

• Our FY19F earnings have been raised by 26% as the group’s 1HFY19 core net profit of RM140mil was above expectations, accounting for 61% of our FY19F earnings and 57% of consensus. As a comparison, the group’s 1H accounted 47%–51% of core earnings in FY12–FY14 before the emergence of impairments which skewed its results. We have largely fine-tuned FY20–FY21F earnings as our assumptions are unchanged.

• While the full impact of the group’s 2ppt hike on the US$660mil (RM2.7bil) refinanced term loan on 23 May this year has not been fully reflected in 2QFY19, management views that the worst is over for Armada Kraken’s operational performance which has been delivering sub-par production levels.

• Nevertheless, management did not provide clarity on Armada Kraken fully achieving the client Enquest’s contracted production targets. Its construction vessels, which have been idle since December last year, could still be idle in the Caspian Sea this year unless additional work scope can be secured from LukOil.

• Bumi Armada’s 2QFY19 revenue rose 9% QoQ to RM536mil from the improved operational performance of Armada Kraken which had resolved its power generation issues, supported slightly by one-off productivity incentives and additional charter days from Armada Olombendo. This primarily drove 2QFY19 net profit up by 26% QoQ to RM78mil.

• The stock trades at an unjustified FY19F PE of 4x currently against the backdrop of diminishing capital-raising risks.

Source: AmInvest Research - 30 Aug 2019