Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with an 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 although the group’s FY19 core net profit of RM311mil (+67% YoY), excluding one-off impairments of RM303mil, was above expectations, coming in 40% and 28% above our and street’s forecast respectively.

• The impairments include RM234mil from the loss of the Armada Claire legal case against Woodside Energy Julimar in Australia, RM43mil impairments for subsea construction vessels (Armada Installer & Armada Constructor) and unrealised forex loss of RM19mil, together with the sale of FPSO Armada Perdana, 5 offshore support vessels (OSV) and 2 associated Nigeria-based OSV operations.

• While the operational performance of the Kraken FPSO has substantively improved, the group’s 2 offshore construction vessels in the Caspian Sea are still unutilised amid poor contract visibility. This could mean additional impairments this year if no contracts are secured. Hence, our forecasts are largely unchanged.

• Additionally, the group’s offshore support vessel utilisation remains low at only 54% currently. This could mean further provisions as the company aims to dispose of this division, currently seen as a minor operation, accounting for 16% of FY19 group revenue.

• Bumi Armada’s 4QFY19 revenue slid 2% QoQ to RM516mil largely from the adjustment to Armada Kraken’s charter due to compensation for low operational benchmarks. This was partly offset by offshore marine vessel revenue rising by 30% QoQ due to third-party net charters in 3QFY19.

• Together with the halving of joint venture/associate contributions due to the absence of one-off India-based tax exemptions registered in 3QFY19, the group’s 4QFY19 core net profit dropped 24% QoQ to RM55mil.

• As Enquest recently reported an improved production efficiency of over 90% in 2H2019 and average daily gross production of 35,704 barrels of oil for its Kraken project in 2019, we continue to 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.

• While net gearing remains elevated at 2.6x, Armada Kraken’s operational improvement has reduced the prepayment risk of a RM1.3bil loan, which will lead to a reclassification from short term to long term by 1Q2020. Together with the group potentially aiming to monetise its OSV and FPSO vessels, we view the risk of an equity-raising exercise as remote currently.

• The stock trades at a fair FY20F PE of 10x currently against a backdrop of a sustainable earnings recovery and improving balance sheet risks.

Source: AmInvest Research - 28 Feb 2020