- We maintain our BUY call on Bumi Armada with a lower fair value of RM2.45/share (vs. 2.60/share previously), based on our sum-of-parts valuation.

- We have lowered Bumi Armada’s FY14F-FY16F earnings by 6%-9% as the group’s 9MFY14 net profit of RM163mil (-21% YoY) came in below expectations, accounting for 66% of our earlier forecast and 60% of street estimates. As expected, the group did not declare any interim dividend.

- Our FY14F-FY16F EBIT margin assumptions for the offshore support vessel (OSV) and transport & installation segments (T&I) have been further trimmed by 3ppts and 5ppts respectively.

- On a sequential basis, the group’s 3QFY14 net profit rose by 10% QoQ to RM98mil due to:- (1) initial contributions from the Angolan FPSO and new tanker MT Ulysses; (2) 2ppts improvement in OSV utilisation rate; and (3) contribution from the ramp up of pipe laying and post trenching activities on the LukOil project in the Caspian Sea, as well as O&M activity for the Armada Installer.

- However Bumi Armada’s 9MFY14 net profit saw a decline of 21%, despite a 12% YoY increase in revenue. This was mainly due to a contraction in EBIT margin of 10ppts for the both the OSV and T&I segments. This was further exacerbated by higher depreciation of new vessels and a higher tax rate of 18% (9MFY13: 12%) due to T&I activities.

- Following the group’s change in earnings recognition from operating to finance lease for its new floating, production, storage and offloading (FPSO) vessels, the earnings accretion from the Kraken and Angola vessels has been much lower than expected due to the initial slow phase during the conversion period.

- Meanwhile, the group’s firm order book of RM23bil, and the total order book (including existing options) of RM35bil, are expected to support the group’s future earnings prospects. The order book is above SapuraKencana’s current RM27bil.

- The group is currently looking at bidding for nine FPSO projects which we believe could involve capex of US$1bil- US$1.5bil, out of which three are in Ghana, Nigeria and Namibia. This increasingly visible project pipeline underpins the stock’s re-rating catalyst.

- Bumi Armada now trades at an attractive FY15F PE of 14x.

Source: AmeSecurities