Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged forecasts and sum-of-parts-based (SOP) fair value of RM0.76/share, which also reflects a neutral ESG rating of 3 stars and implies an FY22F PE of 6x.

• Bumi Armada has disposed of 3 ice-class offshore support vessels (OSV) named Bumi Uray, Bumi Pokachi and Bumi Naryan Mar, which have been operating for LukoilNizhnevolzhskneft Ltd in the Caspian Sea, Russia since 2016, for US$45mil (RM186mil) cash.

• This will halve the number of OSVs in the group’s fleet to just 3 units. Other than the floating production and operation (FPO) vessels, the group still has 2 wholly-owned construction vessels, Armada Installer and Armada Constructor in the Caspian Sea and a jointly-owned unit operating in Indonesia currently.

• While the 2 construction vessels in the Caspian Sea are idle presently, we understand that they may have contracts lined up later this year.

• With the sale expected to be completed in 1QFY22, we estimate a one-off disposal loss of RM34mil, based on the vessels’ net book value of RM220mil. This translates to a significant 5% of FY22F earnings.

• Nevertheless, the impact could halve to a milder extent by the absence of losses in 4QFY21 as these 3 vessels registered a 9MFY21 loss of RM57mil.

• Given the group’s FY21F huge net debt of RM7.9bil, we estimate a negligible impact to FY22F net gearing of 1.6x.

• Even so, we are not surprised by this development which is part of the group’s strategy to redeploy resources to its core FPO segment and exit the offshore marine services (OMS), in line with management’s past guidance.

• Meanwhile, the group’s firm order book slid by 2% QoQ to RM14.6bil from revenue depletion. Together with optional extensions worth RM9.6bil, these translate to 9.6x FY22F revenue.

• Valuation-wise, we reiterate our view that Bumi Armada’s FY22F PE of 4x is unjustified vs. FBMKLCI’s 17x as the group has successfully stabilised its core earnings and balance sheet health with the optimisation of Armada Kraken’s operations since 4QFY20.

Source: AmInvest Research - 20 Jan 2022