Investment Highlights

• We maintain BUY on Bumi Armada with an unchanged sum- of-parts (SOP) derived fair value (FV) of RM0.68/share . This implies a FY24F PE of 4.9x, below its 3-year average of 7.5x. The FV reflects our neutral ESG rating of 3- star .

• Bumi Armada’s FY23 core net profit (CNP) of RM756mil was above expectations, exceeding our estimate by 27% and street’s by 24%. The significant variance was driven primarily by the earlier-than-expected resumption of operations for floating production, offloading and storage (FPSO) vessel Armada Kraken in August 2023 following the successful installation of replacement hydraulic submersible pump (HSP) transformers D and A.

• We tweaked FY24-FY25F earnings by 1%-3% on higher group operating margins by 100 bps moving forward from economies of scale for Armada Kraken.

• YoY, the group’s FY23 revenue declined by 11% due to:
  
  (i) lower charter revenues from Armada Kraken,
  
  (ii) lower offshore support vessel (OSV) revenue following the disposal of its final asset in May 2023, and
  
  (iii) reduced recognition from subsea construction in the Caspian Sea as works were completed. Hence, FY23 CNP declined broadly in line by 13.9% as operating margins remained relatively stable at 62.3%.

• QoQ, Bumi Armada’s 4QFY23 revenue rose by 18.7% sequentially due to the recognition of charter income for FPSO Armada Kraken following the restoration of operations in August 2023 and resolution of cost claims with client Enquest. 4QFY23 CNP shot up higher by 72% QoQ on the back a 16.3%-point improvement in EBITDA margins due to stronger economies of scale, reversal of accrued costs relating to outstanding issues with Enquest and closure of OSV business.

• Notably, 4QFY23 saw substantial impairments amounting to RM514mil related to: i. Armada Kraken whose present value of cashflows (or value-in-use) will be impacted by a significant reduction when the project’s charter rates reduce by 70% during the option period after March 2025 and exacerbated by straight-line depreciation of the vessel cost. Additionally, the discount rate used to determine was also higher at 8.5%. ii. Subsea assets due to the impact of prolonged Russian-Ukrainian conflict and the resultant sanctions which have delayed potential projects in the Caspian Sea region.

• Bumi Armada’s balance sheet continues to see an improvement with the repayment of US$57mil of debt in 4QFY23, bringing its net gearing ratio to 65%, the lowest level since FY15. Recall that the group had recently reclassified several facilities due within the next 12 months, raising its borrowings under current liabilities to RM2.3bil. Management updates that the group expects to finalise the refinancing option for the RM1.5bil Sukuk Murabah due in September 2024 within the next 2 months.

• The group’s 30%-owned FPSO Armada Sterling V saw first oil on 7 January. The vessel has been working towards final acceptance and has recently completed its first offload. We gather from management previously 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.

• The group is also working towards extension of contract 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 rate.

• We continue to like Bumi Armada due to the bullish FPSO subsector prospects amid limited global operators with adequate financial and technical capabilities. We believe 2024 will be an execution year for the group as management works towards ensuring steady operational performance at 95%-100% and final acceptance for Armada Sterling V. 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 further rating catalysts for Bumi Armada.

• Valuation-wise, we see potential upside in Bumi Armada in view that it is trading at undemanding FY24F PE of 3.8x 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 - 29 Feb 2024