Investment Highlights

• We upgrade Bumi Armada to BUY from SELL with a higher fair value (FV) of RM0.47/share vs. an earlier RM0.10/share, based on its 5-year P/BV trough of 0.2x. Our FV is based on a 30% discount of the group’s sum-of-parts as there could be additional impairments due to idle vessels, especially for the 2 offshore construction units in the Caspian Sea.

• We reckon Bumi Armada should be able to meet its debt repayment obligations, in which RM680mil is due in the next 12 months. The proceeds should be internally generated from the FY20F EBITDA of RM1.2bil and due collection from trade receivables which have risen by 60% over the past 6 months to RM671mil.

• Despite the substantively higher receivable level, 86% falls within the group’s usual 60-day credit terms compared with 79% in 4QFY19. Management expects trade receivables to progressively taper down towards the end of the year, which should further improve the group’s cash inflow.

• Our forecasts have been raised by 14%–23% due to higher utilisation of the floating production, storage and offloading vessel Armada Kraken, as the unit has demonstrated the capability of sustaining production over the past 2 quarters.

• The group’s 1HFY20 core net profit of RM210mil (+50% YoY), excluding one-off impairments of RM314mil for offshore marine services (OMS), was above expectations, coming in at 61% of our earlier FY20F earnings and 73% of street’s. As a comparison, 1H accounted for 39%–49% of FY18–FY19 core net profit, with the high volatility stemming from Armada Kraken’s former erratic operating performance and OMS’ utilisation rates.

• The group’s 2QFY20 core net profit rose 33% QoQ to RM120mil in tandem with revenue rising 10%, driven by Armada Kraken’s improved operations, which management guided could be representative for the full year. However, OMS revenue fell 6% QoQ to RM86mil despite a 1ppt rise in vessel utilisation to 55%.

• For the main floating production & operation segment, EBIT slid 3% QoQ to RM345mil due to higher repair & maintenance costs for Armada Olombendo and forex losses, which were partly offset by higher revenues from Armada Kraken.

• Even though the market remains subdued from the Covid-19- inflicted global oil production cuts, management is still planning to monetise the OMS division, currently seen as a minor operation, accounting for 15% of 1HFY20 group revenue.

• While 12 vessels are currently cold-stacked, the group has not sold any of the OMS units during 2QFY20 vs. 2 vessels which were disposed of in 1QFY20. This is due to the Covid-19 pandemic which has restricted cross-border travels.

• Nevertheless, as the group has significantly improved core earnings over the past 2 quarters, we view that the 45% discount to BV as unjustified.

Source: AmInvest Research - 28 Aug 2020