Investment Highlights

• We maintain our SELL recommendation on Bumi Armada with an unchanged fair value of RM0.10/share, based on its 5-year P/BV trough of 0.2x.

• Our forecasts are maintained as the group’s 1QFY20 core net profit of RM90mil (+45% YoY), excluding one-off impairments of RM314mil for offshore marine services (OMS), was within expectations, coming in at 29% of ours and 31% of street’s FY20F earnings. As a comparison, 1Q accounted for 17%–38% of FY17–FY19 core net profit due to the volatility in Armada Kraken operating performance and OMS’ utilisation rates.

• The impairments include RM170mil for the two subsea construction vessels (Armada Installer & Armada Constructor) and the balance for offshore support vessels (OSV). With 12 vessels currently cold-stacked, the group has sold 2 of its 32 units in the quarter.

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

• 1QFY20 floating production & operations (FPO) revenue rose 10% QoQ to RM462mil from Armada Kraken’s improved operations, which management guided could be representative for the full year. However, OMS revenue fell 6% QoQ to RM91mil despite a 2ppt increase in vessel utilisation to 56% due to the sale of 2 vessels and lower spot charter rates.

• While group revenue rose by only 7% QoQ, core net profit surged 65% QoQ largely from the higher revenues, realised foreign exchange gains and lower lumpy repairs & maintenance costs from Armada Olombendo. This was partly offset by an associate loss of RM5mil from a positive gain of RM24mil in 4QFY19 due to higher one-off deferred tax provisions from its 49%-owned Armada Karapan Sterling III.

• Even though the market remains subdued from the Covid-19- inflicted global oil production cuts, management is still planning to dispose of the OMS division, currently seen as a minor operation accounting for 16% of 1QFY20 group revenue.

• As Enquest recently announced that the Kraken project’s output was ahead of expectations while retaining overall 2020 production guidance, Bumi Armada views that its long-term FPSO charters have low cancellation or termination risks while such possibility remains high for shorter-term OSV charters.

• As we had earlier indicated, the group’s balance sheet, while still bearing an elevated net gearing of 2.9x, has improved with the reclassification of Armada Kraken’s short-term debt of RM1.3bil to long-term debt. The group’s FY20F EBITDA of RM1.1bil is likely to cover the remaining RM873mil short-term debt.

• The stock’s P/BV of 0.4x could drop further due to additional impairments, potential contract cancellations amid high gearing levels as global oil & gas activities are being sharply reduced.

Source: AmInvest Research - 29 May 2020