Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged sumof-parts (SOP) based fair value of RM0.83/share. This also reflects a neutral ESG rating of 3 stars and implies an FY23F PE of 3x compared to the FBM KLCI’s 16.5x.

• Bumi Armada's 1HFY22 core net profit (CNP) of RM436mil, after taking out RM24mil net write-back of trade receivables impairment and RM88mil impairment losses of accrued lease rental due to unsuccessful appeal against Woodside Energy Julimar Pty Ltd, came in above expectations at 66% of our earlier FY22F net profit and street's estimates.

• Subsequently, we raise our FY22F–FY23F earnings by 5–6% mainly to account for slightly higher EBIT margins on the floating production and operation (FPO) division as well as lower depreciation expenses.

• The group’s 1HFY22 CNP grew by 12% YoY mainly due to lower depreciation expenses and finance costs. This more than mitigated the drop in EBITDA margin by 7% points from higher operating expenses.

• QoQ, 2QFY22 revenue rose 17% to RM618mil on the back of higher construction revenue from the US$50mil Lukoil contract subsea construction works in the Caspian Sea, additional revenue from a preliminary front end engineering and design project, coupled with resilient contributions from its floating production storage offloading (FPSO) operations.

• On top of the higher revenue, slightly lower operating expenses and higher share of profits from joint venture and associates further spurred earnings growth, with 2QFY22 CNP improving by 37% QoQ to RM252mil.

• We also gather that the construction progress of ONGC’s Kakinada 98/2 FPSO, in which the group has a 30% effective equity stake, has reached over 90% completion as at endJune 2022, and is on track to sail away by the end of 2022. Recall that a force majeure notice was issued by the JV partners to ONGC during the Covid-19 pandemic restrictions at Sembcorp Marine’s yard in Singapore.

• Meanwhile, the group's firm order book has slightly slid by 1% QoQ to a still robust RM13.1bil as of the end of 2QFY22. Combined with optional extensions worth RM9.4bil, this translates to a comfortable 10x FY22F revenue.

• Management also submitted several tenders for new FPSO projects and is expected to disclose more details in 3QFY22. Upstream Online reported that Bumi Armada was among the active bidders for Eni’s 1 billion barrel deep-water Agogo project offshore Angola. Potential contenders for the project include Yinson, MISC and Italy-based Saipem.
• The group remains keen on disposing of the remaining 3 offshore support vessels (OSV) in the upcoming quarters with plans to further pare down its debt from the proceeds. It has already secured a buyer for an OSV with an estimated price of RM56mil (classified as held-for sales in 2QFY22 balance sheet), with the actual sale likely to materialise in the coming quarter.
• Valuation-wise, we see more potential upside in Bumi Armada in view of its FY23F PE of 3x vs. the FBM KLCI's 16.5x. This is underpinned by steady core earnings in the near future following the normalisation of Armada Kraken's operations.

Source: AmInvest Research - 26 Aug 2022