Investment Highlights

• We maintain our BUY recommendation on Bumi Armada with an unchanged sum-of-parts based fair value of RM1.22/share, which implies an FY19F PE of 14x vs. the sector’s over 20x currently. The risk profile of the group is improving with its clientele’s upcoming albeit belated final acceptances of the floating production, storage and offloading (FPSO) vessels Olombendo and Kraken. The group did not declare any dividend, as expected.

• Excluding an impairment provision of RM38mil for the FPSO Armada and RM10mil general doubtful debt provision for Offshore Marine Services (OMS), net of RM15mil gain from the disposal of an OMS vessel, and revenue adjustment for Armada Perkasa, the group’s 1QFY18 core net profit of RM82mil was in line with expectations, accounting for 18% of our and consensus’ FY18F earnings.

• While this may appear low compared to 1QFY17, which accounted for 28% of FY17 core net profit, we expect the group’s earnings to progressively improve from 2QFY18 with EnQuest’s expected final acceptance of FPSO Kraken next month together with Lukoil’s higher offshore construction activities in the Caspian Sea.

• Eni’s final acceptance of FPSO Olombendo, already recognised under finance lease accounting, on 17 May 2019 will also slightly accrue to the group’s forward earnings. The group’s recognition of its bareboat revenue recognition for FPSO Olombendo is expected to increase from 90% in 1QFY17 to 100% in 2HFY18 while for the Kraken FPSO rise from 70% to 100%, in the absence of any technical issues.

• Bumi Armada’s 1QFY18 revenue decreased 9% QoQ to RM600mil mainly due to lower seasonal construction activities in the Caspian Sea and an 8ppts drop in vessel utilisation rate to 38%. However, the group’s 1QFY18 core net profit rebounded 80% QoQ to RM82mil due to FPSO Olombendo’s withholding tax being reclassified as cost of sales in 4QFY17 and capitalisation of some project management costs in 1QFY18. This was partly offset by higher 1QFY18 effective tax rate of 26% vs. 3% in 4QFY17.

• On a YoY comparison, the group’s revenue rose 49% due to higher revenues from both FPSOs Olombendo and Kraken. However, core net profit slid 6% YoY due to lower JV contribution following the full project financing impact of the 49%-owned Karapan Armada Sterling III, operating in Madura field off Indonesia, partly offset by the higher FPSO contributions.

• Upstream had earlier reported that Bumi Armada has emerged as the front-runner to land the charter for a huge FPSO, which could cost over US$1bil, for Eni’s Zabazaba project off Nigeria in in the OPL 245 field. Assuming that the capex for the FPSO is similar to Olombendo's US$1.5bil in Angola with a project IRR of 11%, we estimate that Bumi Armada's SOP could be raised by 11 sen or 10% to RM1.34/share, if the charter was successfully secured. The stock currently trades at a compelling FY18F PE of 10x vs. the sector’s 20x with near-term earnings recovery in the horizon.

Source: AmInvest Research - 31 May 2018