Investment Highlights

• We maintain BUY on Bumi Armada with a higher sum-of-parts (SOP) based fair value of RM0.76/share (from an earlier RM0.72/share). This also reflects a neutral 3-star ESG rating and implies a FY22F PE of 6x, half of its 5-year average of 12x.

• Our FY21F–FY23F earnings have been raised by 27% from a 5-percentage point increase in EBIT margin assumption to 50% for the group’s floating production, storage and offloading (FPSO) division.

• This stems from the group’s 1HFY21 core net profit (excluding net impairments of RM72mil) of RM375mil (+78% YoY) coming in above expectations, accounting for 69% of our FY21F net profit and 78% of street’s. As a comparison, 1H accounted for 39%–49% of FY18–FY20 core net profit.

• The group’s 1HFY21 revenue inched up 2% YoY while EBITDA was flat. However, 1HFY21 core net profit surged 78% YoY from a 23% drop in interest costs, 9% decline in depreciation and a lumpy turnaround in associate contribution.

• Bumi Armada’s 1QFY21 core net profit rose 39% QoQ to a record RM227mil, the highest quarterly earnings since listing in 2011. This mainly stemmed from a lumpy 5.6x jump in associate contribution, RM17mil reversal of deferred tax provision and positive minority charges from variation orders at operation and maintenance operations.

• The 2QFY21 operating profit of the main floating production & operation (FPO) segment, which accounted for 87% of group revenue, slid 5% QoQ to RM345mil due to higher lumpy operating costs for Armada Olombendo. Nevertheless, the vessel availability was high at 99% (vs. 98% in 1QFY21), translating to an 8% QoQ rise in FPO revenue to RM533mil.

• The offshore marine services (OMS) disposed of 2 vessels in 2QFY21 which partly led to this segment’s operating profit to drop 42% QoQ to RM7mil. Even so, this segment’s revenue rose 22% from the in-chartering of third-party vessels while the dwindling number of vessels caused utilisation rates to rise to 70% in 2QFY21 from 44% in 1QFY21.

• Meanwhile, the group’s firm order book slid by 6% QoQ to RM14.9bil from revenue depletion, partly offset by a weaker ringgit. Together with optional extensions worth RM9.5bil, this translates to 9.5x FY21F revenue.

• Besides the existing projects that continue to support its cash flows, Bumi Armada plans to further pare down its debt and fully monetise its OMS assets, in which 6 of the 14 remaining vessels have already been earmarked for disposal.

• Valuation-wise, we view Bumi Armada’s FY21F PE of 3.5x as unjustified vs. FBMKLCI’s 17x as the group has stabilised its core earnings and balance sheet health with the optimisation of Armada Kraken’s operations since 4QFY20.

Source: AmInvest Research - 27 Aug 2021