Investment Highlights

• We downgrade our recommendation on Bumi Armada to HOLD from BUY with a lowered fair value of RM0.60/share (from an earlier RM1.22/share), based on a 50% discount to our revised sum-of-parts of RM1.21/share and implies a 30% discount to book value. The risk profile of the group remains elevated given its short-term unsecured debt of RM2bil as at 30 June 2018 against the backdrop of impairment losses.

• The group is planning on refinancing its debt or tapping a US$1.5bil Euro medium-term note issuance. Alternatively, there are plans for partial divestments of its wholly-owned FPSO Olombendo, which although has recently achieved full acceptance, will reduce its earnings contribution to the group. Management highlighted that a cash call is not being considered at this stage.

• The group made provisions of RM644mil, of which impairments of RM478mil (74%) mostly stemmed from Armada Kraken’s penalties arising from different technical specifications determined in the contract amendment to mitigate Bumi Armada’s exposure to the client EnQuest’s claims. The remaining provisions derive mainly from impairments of receivables and deposits for the group’s offshore marine services (OMS).

• We have cut Bumi Armada’s FY18F-FY20F earnings by 26%-29% on lowered FPSO revenue assumption and margins as the group’s 1HFY18 core net profit of RM107mil (excluding these one-off impairments) was below expectations, accounting for 24% of our earlier and consensus’ FY18F earnings. The group did not declare any dividend as expected due to the all-in losses.

• We expect the group’s earnings to progressively improve with EnQuest’s expected final acceptance of FPSO Kraken, which has a stronger likelihood due to the charter amendment as it has narrowed the technical requirements.

• Bumi Armada’s 2QFY18 revenue rose 9% QoQ to RM654mil mainly due to higher Lukoil’s seasonal construction activities in the Caspian Sea. However, the group’s 2QFY18 core net profit plunged 87% QoQ to RM11mil due to higher cost of sales arising from EnQuest’s RM100mil (US$25mil) technical penalty claims on Armada Kraken up to 17 December this year. Excluding this one-off cost, we estimate that Bumi Armada’s core earnings could have risen by 36% to RM111mil.

• The group’s revised order book of RM32bil, of which 63% comprise firm charters, accounts for a comfortable 12.8x FY18F revenue. The group remains on the prowl for new FPSO charters in West Africa and Brazil. Upstream had earlier tipped Bumi Armada to secure the charter for a huge FPSO 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.

• Currently, the stock trades at a fair FY18F PE of 12x due to its balance sheet concerns.

Source: AmInvest Research - 29 Aug 2018