Investment Highlights

• We upgrade our recommendation on Bumi Armada with a higher fair value of RM1.22/share (from an earlier RM0.79/share) by removing the 30% discount to our revised sum-of-parts (SOP) valuation of RM1.22/share, as the risk profile of the group has substantively improved with its clientele’s upcoming acceptances of the floating production, storage and offloading (FPSO) vessels Olombendo and Kraken, supported by minimal 4QFY17 impairment charges.

• We have raised Bumi Armada’s FY18F-FY19F earnings by 30%- 37% due to higher revenue and margin recognition assumptions for the FPSOs Olombendo and Kraken.

• Excluding unrealised forex losses of RM49mil, RM95mil gains from disposal of vessels and minimal RM8mil impairment charge, the group’s FY17 core net profit of RM314mil was generally within expectations. The group did not declare any dividend, as expected.

• The group has managed to improve its bareboat revenue recognition for the Olombendo FPSO from 80% of the contracted charter in 2QFY17-3QFY17 to 90% in 4QFY17 with final acceptance targeted in 1QFY18. For the Kraken FPSO currently producing 50,000 barrels, the bareboat charter revenue is largely unchanged at 70%-80% of the original contractual sum, with final acceptance further delayed from 1QFY18 to 2QFY18.

• Bumi Armada has classified its RM2.1bil Kraken debt as current liabilities as lenders have the right to issue a notice for full loan prepayment due to the project delays. However, with final acceptance expected by 2QFY18, this debt will be reclassified back to long-term liabilities according to the contract maturities.

• Excluding the one-off items, the group’s 4QFY17 core net profit slid slightly QoQ to RM45mil as the lower contributions from the FPSO segment were partly offset by higher margins from the Offshore Marine Services (OMS) segment and a 15ppt drop in effective tax rate to 3% from past over-provisions.

• The higher margins stemmed from lower operating costs more than offset the OMS revenue which declined 12% QoQ from seasonally lower transportation and installation activity in the Caspian Sea and a 6ppt reduction in offshore support vessel utilisation to 48%. Even though FPSO revenues have risen by 13% QoQ, this was more than offset by higher operating expenses, which caused the segment’s EBIT margin to fall 5ppt to 23%.

• To improve its balance sheet profile, the group plans to issue euro medium-term notes, of which US$1.5bil are still untapped, proposed back in 2013 together with disposal of minor stakes in completed FPSO projects such as Olombendo once full acceptance has been achieved. The stock currently trades at a compelling FY18F PE of 11x vs. the sector’s 20x with near-term earnings recovery in the horizon.

Source: AmInvest Research - 26 Feb 2018