• We have maintained our HOLD recommendation on Bumi Armada with unchanged forecasts and fair value of RM0.79/share based on a 20% discount to our sum-of-parts (SOP) valuation of RM0.99/share.

• Bumi Armada has suspended the operations of its wholly-owned floating production storage and offloading vessel (FPSO) Armada Perdana following irregular payments for the operation and maintenance (O&M) services together with long-delayed charter payments involving the OML 120 block, Oyo field, off Nigeria by independent oil & gas operator Erin Energy Corporation.

• Recall that two of Bumi Armada’s FPSOs, including Armada Perkasa, were operating in Nigeria, but was only being remunerated for their O&M services since 2Q2016, but without being compensated for the bare boat charter, which makes up the main bulk of their revenues. These were the first two FPSO charters secured by the group, in which the cost of the vessels amounted to US$200mil each.

• In the last quarter briefing, management indicated that Armada Perkasa’s sale to Eni would be completed by the end of this month but the selling price was not revealed. We understand that no provisions would be needed for this vessel as the necessary impairments had already been accounted for in FY16.

• As the outstanding Armada Perdana and Perkasa claims by Bumi Armada has been fully provided for in FY16, we estimate a 4%-5% reduction to FY17F-FY19F earnings stemming from the loss of O&M revenue recognition from the 2 Nigerian vessels.

• With the suspension of Armada Perdana’s operation, Bumi Armada’s activities in Nigeria have reached an end, with the only remaining FPSO operation Africa by Armada Olombendo having achieved first oil in Angola on 8 February this year.

• Even with the full recognition of the massive US$1.5bil Armada Olombendo, we remain cautious on the company’s near-term earnings trajectory given the uncertain penalties which could arise from the delays in the commencement of the US$1bil FPSO Kraken’s contract in the North Sea.

• Recall that some of Kraken’s undisclosed late delivery provisions were only up to the backstop date of 1 April 2017 which was later extended to 1 July this year. The backstop date gives the client the right to terminate the charter. With penalties potentially accruing at US$6mil/month, negotiations with the client Enquest are still deadlocked.

• Any improvement in OSV utilisation, currently with charter rates just above EBITDA breakeven levels, will be gradual against the backdrop of prevailing oil price. Given the past earnings disappointment, the group needs to convincingly navigate past its 2QFY17 results to reach its re-rating inflection point.

• The stock currently trades at a fair FY17F PE of 15x vs. the sector’s 20x due to lingering risks on 2HFY17 earnings recovery.

Source: AmInvest Research - 22 Jun 2017