We maintain BUY on Bumi Armada with a lower sum-of-parts (SOP) based fair value of RM0.69 (from RM0.86/share previously) after adjusting our earnings estimate lower as well as imputing a 20% valuation discount for Armada Kraken floating production storage and offloading (FPSO). Our fair value also reflects a neutral ESG rating of 3-stars.
We cut our FY23F earnings by 11% after pencilling in a lower earnings contribution from Armada Kraken FPSO premised on our assumption of a 3-month operation disruption from the recent shut-in. While the timeline of the potential resumptions of Armada Kraken remains uncertain due to a lack of clarity from the management, we expect the FPSO to resume operations in 4QFY23. Thus, our FY24F-FY25F forecasts are largely unchanged for now.
Last Friday, Bumi Armada announced that the production from Armada Kraken was recently shut in as a result of the failure of critical hydraulic submersible pump transformers. The group is now working with the charterer EnQuest to assess alternative technical solutions, with the aim of resuming the vessel’s operations in the coming weeks.
Meanwhile, the group plans to concurrently implement key maintenance activities that are originally scheduled for execution in 3QFY23 during the period of the shut-in. This would help mitigate any further outages of the vessel for the remainder of 2023.
We are negative on Armada Kraken’s operation stoppage as it is expected to reduce charter earnings from the vessel by at least 1 quarter. We highlight that the FPSO is one of the biggest earnings contributors for Bumi Armada which accounted for 30-35% of FY22 EBIT, based on our estimates.
Our preliminary analysis also suggests that an operational halt (and therefore a loss of charter earnings) of 3-6 months coupled with necessary maintenance expenses may lead to a 11-23% decline in FY23F earnings.
We also do not rule out the possibility of penalties being imposed on Bumi Armada from the shut-in of Kraken FPSO which would result in unfavourable impacts on the charterer’s financials. In the event that the group is required to fully compensate EnQuest for any earnings losses from the oil production outage in 3QFY23, we estimate the potential penalty to be RM63mil-78mil based on assumptions of: (i) daily oil production of 14K-15K barrels of oil per day, (ii) oil price of U$70-75/barrel, (iii) operating expenses of U$23-25/barrel, and (iv) MYR/USD of 4.40.
The operation hiccups may also dampen the group’s prospects in bidding for new projects despite its continued success in deleveraging its balance sheet over the past few quarters.
Valuation-wise, Bumi Armada is trading at a compelling FY23F PE of 4x vs. the FBM KLCI's 13x. This is underpinned by the sustainable earnings stream from its FPSO operations as well as the improved balance sheet.
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