Investment Highlights

• 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.

• Our valuations are maintained although the group’s long delayed floating production, storage and offloading (FPSO) vessel Armada Kraken has managed to offload its first cargo on 12 September 2017.

• This is because the charter rates for the FPSO are currently uncertain pending the client Enquest’s full acceptance of the vessel.

• Bumi Armada has indicated that an interim agreement has been reached between the group and EnQuest for the payment of the charter rates based on the proportion of FPSO Kraken’s processing capability vs. the field’s production rate.

• Recall that the FPSO Kraken will be receiving reduced charter rates due to technical problems which have caused lower-than expected production rates.

• While management indicated that the Kraken charter, even at the lower temporary rates, could still be profitable this year, we remain conservative given the group’s past earnings disappointments.

• The Armada Kraken FPSO arrived at the location in the UK’s North Sea on 13 February 2017 and completed its hook-up on 15 February 2017. The FPSO then achieved first oil on 28 June 2017, 4½ months after its hook-up to the site.

• Recall that Enquest had awarded a US$1.8bil FPSO charter for an initial 8 years (which includes 17 years of optional extension) to Bumi Armada back in 2013.

• While the group’s earnings from 2QFY17 onwards could potentially improve from the full recognition of the FPSO vessel Armada Olombendo, which achieved first oil on Feb 8 this year, we remain cautious on the company’s near-term earnings trajectory given the uncertainties arising from Kraken’s lower charter payments.

• Even though OSV utilisation rates are improving, management affirmed that charter rates are still weakening against the backdrop of the prevailing oil price which continues to slow down the progress of new potential projects.

• The stock currently trades at a fair FY17F PE of 14x vs. the sector’s 20x due to lingering risks on 2HFY17 earnings recovery.

Source: AmInvest Research - 14 Sept 2017