Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged sumof-parts (SOP) derived fair value of RM0.68/share (Exhibit 2). This implies a CY24F PE of 4x, below its 3-year average of 6x a neutral ESG rating of 3-star (Exhibit 6).

• Bumi Armada's 9MFY23 core net profit (CNP) of RM444.5mil (after stripping off unrealised foreign exchange losses of RM15.3mil and gains on disposal of a subsea joint venture in Indonesia of RM18.1mil) was within our expectations, making up 79% of our FY23F earnings and 74% of consensus projection. For reference, 9MFY22 accounted for 74% of its FY22 earnings.

• We tweaked our FY23F earnings higher by 7% to account for an earlier resumption of FPSO Armada Kraken’s operations and a stronger group operating margin.

• YoY, Bumi Armada’s 9MFY23 revenue declined by 16.1% to RM1.5bil mainly due: (i) loss of charter revenues from FPSO Armada Kraken arising from the failure of its hydraulic submersible pump (HSP) transformers, (ii) lower recognition from subsea construction contract works in the Caspian Sea as the project nears its completion and (iii) lumpy recognition of preliminary front-end engineering and design works recognised in the prior year. CNP saw a larger decline of 31.7% YoY, weighed by higher operating expenses as evidenced by the 7.5% decline in earnings before interest tax depreciation and amortization (EBITDA) margins to 56.9%.

• QoQ, 3QFY22 revenue rose by 18.9% to RM524.8mil as a result of the resumption of charter revenues for FPSO Armada Kraken. Notably, CNP rose by more than 100% driven by economies of scales from the stronger operations with EBITDA margin rising by 14.2% to 59.1%. Notably, other operating income nearly halved during the quarter mainly due to the prior quarter’s gains on disposal of FPSO Armada Claire.

• Management highlighted that FPSO Armada Kraken has been fully restored to 100% production in August 2023 following the successful installation of replacement HSP pump transformers D and A. Additionally, the group had also received two newly procured HSP pump transformers with one installed in the following month of September to achieve full redundancy and avoid any unforeseen circumstances. This led to a strong recovery in the group’s average uptime for its wholly owned fleet to 98% (vs 93% in Q2FY23).

• The group’s 30%-owned FPSO Armada Sterling V is expected to see first oil by 21st November, which will be followed by the vessel acceptance test which may take up to 3 days. Upon receipt of the acceptance certificate by the client, we expect a firm period for the vessel charter to commence. Recall that the FPSO had arrived at the Kakinada 98/2 field and successfully hooked up with the buoy mooring system in December 2022. Due to the vessel’s idle status, management notes that it has been receiving standby payments since March 2023. Though the group did not disclose the quantum of the payments, we understand that standby rates typically range between 50% to 70% of the daily charter rates.

• Bumi Armada's firm order book value decreased by 5.4% QoQ to RM10.6bil at the end of 3QFY23 due to progressive recognition of its charter contracts, particularly for its wholly owned vessels (Exhibit 3). Combined with optional extensions valued at RM9.8bil, this translates to a comfortable order book cover ratio of 4.9x (against FY23F revenue).

• Management is currently in discussions with client Petrovietnam with regards to the plans for FPSO Armada TGT 1 which is currently expected to end its firm charter period in November 2024. We believe an extension of the charter contract either on a rolling basis or in-line with the end of the concession period to 2031 is likely. However, we expect to see a significantly lower daily charter rate of close to those typically commanded during a charter’s option period, typically at 33% of the firm period rates.

• The group’s balance sheet is also gradually improving as it repaid US$37mil of debt in 3QFY23, bringing its net gearing ratio to 66%, its lowest level since FY15. The group notes that it currently has a net current liabilities position of RM2.3bil, mainly due to the reclassification of facilities due within the next 12 months. Management indicates that it is currently considering refinancing options, preferably through a US$-denominated bond given its topline exposure to the currency.

• We continue to like Bumi Armada due to our positive stance on the FPSO subsector. Additionally, we believe the near-term outlook for subsea pipelaying jobs in the Caspian Sea remains strong. Successful progress on the Akia production sharing contract and new charter wins will be positive rerating catalysts for Bumi Armada.

• Valuation-wise, we see potential upside in Bumi Armada in view that it is trading at undemanding FY24F PE of 4x vs. the FBM KLCI's 15x. We see a sequential improvement in the group’s sustainable core earnings and an improving balance sheet.

Source: AmInvest Research - 17 Nov 2023