• We maintain BUY on Bumi Armada with a slightly lower sum-of-parts (SOP) based fair value of RM0.68/share (from RM0.69/share previously). Our fair value also reflects a neutral ESG rating of 3-star.

• We cut FY23F net profit by 25% due to lower vessel utilisation and higher opex for the core floating production, storage and offloading (FPSO) segment as UK-based Armada Kraken vessel’s operation was disrupted by 2 malfunctioning transformers in 29 July-7Aug. However, FY24F-FY25F earnings were only lowered by 4%-6% as we expect Kraken’s utilisation rates and operational costs to normalise from August onwards. Meanwhile, Bumi Armada's 1HFY23 core net profit (CNP) of RM254mil missed expectations, accounting for 34% of our earlier FY23F net profit and 36% of street’s.

• QoQ, 2QFY23 revenue dropped by 19% on a 5%-point decline in FPSO utilisation mainly due to Armada Kraken’s technical issues. Together with RM40mil additional rectification costs for the vessel, 2QFY23 CNP plunged 71% to RM59mil. Meanwhile, the group's firm order book stabilised at RM11.2bil at end-2QFY23 on weaker ringgit. Combined with optional extensions worth RM9.7bil, this translates to a comfortable 9x of FY24F revenue.

• An immediate re-rating factor would be the potential award of engineering, procurement, construction and commissioning contract with a potential project value of at least US$1bil from TotalEnergies’ Cameia project. In addition, the group is also actively bidding for other FPSO projects and CO2 shipping solutions. The group is also likely to be awarded the Akia exploration block of North Kalimantan, Indonesia which could involve an upstream JV partner.

• Valuation-wise, Bumi Armada is trading at a compelling FY24F PE of 4x vs. the FBM KLCI's 1-year forward PE of 13x. This is unjustified given the group’s the sustainable earnings stream from its FPSO operations as well as an improving balance sheet.

Source: AmInvest Research - 28 Aug 2023