Investment Highlights

• We downgrade our recommendation on Bumi Armada to HOLD from BUY as its share price gains have narrowed the potential upside to our unchanged sum-of-parts-based fair value of RM0.54/share, which implies an FY20F PE of 11x vs. over 20x for the sector.

• Our FY19F–FY21F earnings have been fine-tuned as the group’s 9MFY19 core net profit of RM184mil, excluding one-off items of RM110mil from the sale of FPSO Armada Perdana, 5 offshore support vessels (OSV) and 2 associated Nigeria-based OSV operations, was within our and street’s expectations. This accounted for 72% of our FY19F earnings and 66% of consensus. Comparisons over the past 3 years have been skewed by multiple impairments and losses.

• Bumi Armada’s 3QFY19 revenue slid 2% QoQ to RM528mil from the net impact of third-party OSV charters. However, the group’s 3QFY19 core net profit rose by 15% QoQ to RM72mil largely from higher contribution from the Armada Kraken and one-off tax exemptions for the two 50%-owned India-based FPSOs due to tax domicile changes.

• As Enquest has just reported a production efficiency of over 90% and average daily gross production of 34,286 barrels of oil for its Kraken project in 3QFY19, we view that the worst is over for Armada Kraken’s operational performance, which has been delivering sub-par production levels over the past 2 years. However, we expect this to be mitigated by lower seasonal OSV utilisation during the year-end monsoon season in 4QFY19.

• Management still did not provide clarity on Armada Kraken fully achieving the client Enquest’s contracted production targets. However, the utilisation visibility for the group’s 3 currently idled construction vessels could improve if additional work scope can be secured from Lukoil next year.

• While net gearing remains elevated at 2.6x, the group’s recent refinancing arrangement has extended repayments beyond its earlier short-term duration with the RM1.5bil sukuk being reclassified under long-term liability. The group is currently negotiating with its lenders for the RM1.6bil loan, extended for the financing of Armada Kraken, which could be reclassified from short term to long term by this year-end.

• As the group is planning to dispose of some of its FPSO stakes and has already begun selling off idle OSVs, we view the risk of an equity-raising exercise as remote at this juncture.

• Furthermore, the group has secured a 3-year term loan of US$30mil from its largest shareholder Usaha Tegas to fund the equity of its 30% equity stake in the JV with Shapoorji Pallonji Oil & Gas (Shapoorji) to provide an FPSO vessel for the 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.

• The stock trades at a fair FY20F PE of 11x currently against a backdrop of a sustainable earnings recovery and improving balance sheet risks.

Source: AmInvest Research - 22 Nov 2019