Investment Highlights

• We maintain BUY on Bumi Armada with a higher sum-of-parts (SOP) based fair value of RM0.83/share (from an earlier RM0.76/share), which also reflects a neutral ESG rating of 3 stars and implies an FY22F PE of 8x, half of the FBM KLCI.

• Our higher SOP valuation stems from the huge net debt reduction of RM1.3bil in FY21 on the back of the group’s substantively higher cash flows.

• We lower our earnings by 13% for FY22F and 14% for FY23F on lower margins on the floating production and operation (FPO) segment despite the group registering a record core net profit of RM593mil (excluding net vessel impairments of RM19mil) in FY21.

• This was below expectations as the results came in at 8% below our estimate and 6% of consensus, stemming from higher lumpy operational and maintenance expenses from Armada Olombendo and increased losses from offshore marine services (OMS), which management plans to dispose of and discontinue.

• For FY21, the group’s revenue slid 3% YoY mainly due to the sale of 22 OMS vessels. However, a sharp turnaround in JV contributions in India (Sterling I And II) and Indonesia (Sterling II), supported by significant reductions in depreciation charges (-10%) and finance costs (-19%) boosted core net profit by 23% YoY.

• On a QoQ comparison, Bumi Armada’s 4QFY21 core net profit fell 26% to RM118mil mainly due to the halving of offshore support vessel (OSV) revenue together with higher lumpy operational and maintenance expenses from Armada Olombendo and a RM29mil impairment from the 3 ice-class OSV vessels, which were subsequently sold in January 2022.

• The 4QFY21 FPO revenue increased by 2% to RM480mil with the resolution of an unplanned shutdown at one of 2 trains at Armada Kraken. However, higher costs at Armada Olombendo dragged the division’s net profit 23% lower QoQ to RM260mil.

• For the OMS, in which the group plans to exit, only 3 vessels remain in operation, excluding a unit currently classified as non-current asset held-for-sale. We caution that the new US$50mil Lukoil contract to be completed in the Caspian Sea this year by the group’s 2 construction vessels – Installer and Constructor – may be discontinued by fresh sanctions on Russia’s invasion of Ukraine.

• Meanwhile, the group’s firm order book slid by 3% QoQ to RM13.6bil from revenue depletion. Together with optional extensions worth RM8.9bil, this translates to a comfortable 8.4x FY22F revenue.

• Valuation-wise, we reiterate our view that Bumi Armada’s FY22F PE of 5x is unjustified vs. the FBM KLCI’s 16x as the group has stabilised its core earnings and balance sheet health with the normalisation of Armada Kraken’s operations since 4QFY20.

Source: AmInvest Research - 25 Feb 2022