Investment Highlights

• We maintain our HOLD call on Bumi Armada based on sum- of-parts (SOP)-derived fair value (FV) of RM0.60 per share, which implies FY26F PE of 5.6x, close to +1 std dev above its 5-year average of 4.7x .

• We expect the group’s 2QFY24 core net profit (CNP) to multiply by more than 2.5x YoY to RM210mil mainly due to the loss of 2QFY23 income from floating, production, storage and offloading (FPSO) vessel Armada Kraken, which became inoperable due to failure of its hydraulic submersible pump (HSP) transformers, that was partly offset by gains from the sale of FPSO Armada Claire.

• However, on a sequential basis, we see a decline of 16% for the group’s 2QFY24 CNP as earnings normalise after having recognised a one-off charter backpay amounting to RM53mil in 1QFY24 from the revision of operating fees for FPSO Armada Olombendo.

• This brings our projected 1HFY24 CNP to RM460mil, which could come in at 55% of our full-year estimate and consensus’. Additionally, we do not expect any dividend for the year – consistent with the group’s historical trend.

• Though we do not foresee any surprises for the group’s upcoming earnings announcement, tentatively scheduled in the third week of August, we expect investors to focus on the group’s recent development and near-term catalysts, particularly:
  
  ➢ Extension of charter contract for FPSO Armada TGT 1, due to expire by 14 Nov this year. We understand from management that the operator, Hoang Long Joint Operating Company, is currently undergoing exploration activities at 2 infill wells as part of the Te Giac Trang field phase 2 development, which will potentially involve a tie- back option to the vessel.
  
  ➢ Clarity on standby payments for FPSO Armada Sterling V which recently achieved final acceptance and commenced its firm charter period. However, Upstream reported in June this year that the group is currently facing delayed standby payment issues. Recall that the vessel arrived at the KG-DWN-98/2 field offshore Kakinada, India in end-2022 but saw first oil delayed due to operational challenges from the client.
  
  ➢ Progress on efforts to refinance its net current liability position of RM2.3bil, which arose from reclassification of facilities due by September this year.

• Though we are bullish on the outlook for the FPSO subsector, we turn more selective on beneficiaries for the sector given recent developments within the market. Though larger global competitors such as SBM and Modec are shifting their strategy towards catering to client-owned vessel segment (with capex commitments of >US$3bil), we struggle to gather leads on potential new FPSO contract awards for Bumi Armada. We believe Yinson remains the preferred player within this space given its existing relationships with clients and stronger track record of timely execution relative to Bumi Armada.

• We now see Bumi Armada as fairly priced as the risk-to-reward tradeoff appears more balanced at this juncture with a 3-year (FY23-FY26F) negative earnings CAGR of -5.5% as FPSO Armada Kraken enters the option period which will see daily charter rate reduce by an estimated 75% to ~US$112k per day and the charter period for FPSO Armada TGT 1 ends. The group currently trades at a 2-year forward PE of 4.8x, at par to its 5-year average of 4.7x.

Source: AmInvest Research - 5 Aug 2024