Investment Highlights

• We maintain BUY on Bumi Armada with a higher fair value of RM0.72/share (from an earlier RM0.59/share) with a holding company discount of 20% to the group’s revised sum-of-parts (SOP) of RM0.90/share, which also reflects a neutral ESG rating of 3 stars.

• Our FY21F–FY23F earnings have been raised by 16%–21% from a 4-percentage point increase in EBIT margin assumption for the floating production, storage and offloading (FPSO) division.

• This stems from the group’s 1QFY21 core net profit of RM163mil coming in above expectations, accounting for 36% of our FY21F net profit and 38% of street’s. As a comparison, 1Q accounted for 19% of FY20 core net profit.

• The group’s core net profit surged 80% YoY mainly due to a 26% drop in interest costs from loan repayments, as EBITDA before impairment rose only by 5% YoY to RM405mil.

• Bumi Armada’s 1QFY21 core net profit slid 5% QoQ mainly due to lower FPSO utilisation caused by unplanned shutdowns for Armada Kraken and Armada TGT 1, together with a drop in vessel utilisation for offshore marine services (OMS) to 44% from 49% in 4QFY20 during the monsoon season amid the disposals of 11 vessels.

• The 1QFY21 operating profit of the main FPO segment, which accounted 88% of group revenue, climbed 15% QoQ to RM356mil due to lower lumpy operating costs for Armada Olombendo despite the FPO revenue declining by 7% QoQ to RM495m from lower vessel utilisation.

• Management cautioned that these operating costs could be subject to variation caused by unplanned shutdowns and Covid-19 restrictions. Meanwhile, the group’s firm order book slid by 1% QoQ to RM15.8bil from revenue depletion, partly offset by a weaker ringgit.

• Besides the existing projects that continue to support its cash flows, Bumi Armada’s 49%-owned joint venture with Shapoorji Pallonji Oil and Gas Private Limited has recently secured a licence agreement with the board of trustees for the Port of Mumbai (Mumbai Port) to set up, operate and maintain a floating storage and regasification unit (FSRU) in Mumbai harbour for 30 years.

• Based on management’s guidance that an FSRU could cost US$100mil–US$200mil and a project IRR of 12%, 70:30 debt to-equity ratio and WACC of 9%, we now estimate that this JV could add a slight 1%–2% to Bumi Armada’s SOP of RM5.3bil. Given the group’s improving operating cash flows, we expect Bumi Armada to internally fund this project.

• Valuation-wise, we view Bumi Armada’s FY21F PE of 5x as unjustified vs. FBMKLCI’s 17x as the group has stabilised its core earnings with the optimisation of Armada Kraken’s operations since 4QFY20.

Source: AmInvest Research - 25 May 2021