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.
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