Investment Highlights

• We have maintained our HOLD recommendation on Bumi Armada with an unchanged fair value of RM0.79/share based on a 30% discount to our sum-of-parts (SOP) valuation of RM1.12/share.

• Bumi Armada’s FY18F-FY19F earnings are maintained as its 9MFY17 core net profit of RM218mil was generally within expectations, accounting for 90% of our FY17 earnings and 86% of consensus. As a comparison, 9M results were over 86% for FY14-FY16.

• We are cautious on the group’s ability to deliver a stronger 4QFY17 as the full recognition of the floating production storage and offloading (FPSO) vessel Armada Olombendo, which struck first oil on Feb 8 this year, will only be achieved in 4QFY17. For 2QFY17-3QFY17, the group received only 80% of the contracted Olombendo bareboat charter.

• Excluding the RM74mil gain on disposal of the idle Armada Intrepid FPSO, RM2mil impairment for Dynamac shares and unrealised forex gain of RM5mil, the group’s 3QFY17 core net profit halved QoQ to RM47mil largely due to the absence of lumpy compensation claims and write-back of contingency provisions, estimated at RM100mil for past Lukoil construction work, recognised in 2QFY17.

• As such, the Offshore Marine Services segment, which mustered a slight improvement in vessel utilisation rate to 53%, just barely broke even with a 3QFY17 operating profit of RM4mil.

• The earnings decline was further exacerbated by higher operating costs to ramp up FPSO Olombendo’s production and lower contributions from Kraken’s lower-than-chartered rates, which caused 3QFY17 FPO operating profit to drop 23% QoQ to RM112mil. This was slightly offset by higher capex recoveries from joint ventures Armada Sterling II and III.

• Recall that we noted that FPSO Kraken’s charter revenue could be 25% below its bareboat charter from 2HFY17 until full acceptance, which has been postponed now to 1QFY18 from 4QFY17.

• EnQuest has indicated to Bumi Armada that the FPSO Kraken will be receiving “significantly reduced rates” due to technical problems which have resulted in lower-than-expected production rates.

• Even though OSV utilisation rates are improving, regional charter rates are still soft despite crude oil prices having recovered above US$60/barrel as new potential project rollouts remain lacklustre.

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

Source: AmInvest Research - 23 Nov 2017