- We downgrade Bumi Armada to a HOLD rating with a lower fair value of RM0.90/share (from RM1.50/share previously), as we assigned a larger discount of 40% on our sum-ofparts to reflect the weakness and uncertain outlook on the oil and gas sector – especially in the offshore support vessel (OSV) and Transport & Installation (T&I) front.

- We also cut FY15F-16F earnings by 20%-27% to account for lower utilisation and daily charter rate for the OSV segment, as well as lower contributions from T&I. We foresee the drag on these segments to continue over the coming quarters with no turnaround of earnings in sight anytime soon, due to the protracted weakness in crude oil prices which has led to a slowdown in contract flows and a supply glut of vessels amid capex cuts by oil majors.

- Bumi Armada reported 2QFY15 net loss of RM292mil, which led to a loss of RM220mil for 1HFY15. However, this was largely due to an impairment charge totaling RM384mil mostly related to its OSV fleet and T&I vessels Armada Hawk and Armada Condor. Other one-off items included a gain of RM18mil from the disposal of its Madura EPC subsidiary, net FX losses of 77mil and gain on fair value of financial derivative instruments amounting to RM93mil.

- Excluding the one-off items, Bumi Armada recorded a core net profit of RM142mil for 1HFY15. This is below expectations, accounting for 33% of our FY15 estimates and 34% of consensus’. The group did not declare any dividends this quarter as expected.

- 2QFY15 core net profit fell by 37% YoY mainly due to EBIT losses recorded by:- (i) T&I segment due to lower activities from the LukOil project in the Caspian Sea and lower utilisation from Armada Hawk and Armada Condor, which is now unchartered; and (ii) the OSV segment, as utilisation rates for its OSVs have continued to dip to 54% from 71% in 1QFY15. We understand that eight vessels have been coldstacked as at 30 June 2015.

- However, the FPSO segment remained resilient given the long-term nature of its contracts, with 1HFY15 EBIT for the segment improving by 34% YoY. The group saw higher contributions from Eni 1506 FPSO, initial recognition of revenue from the Malta floating gas project, tanker operations, and O&M contribution from Armada Claire.

- The group expects the impairment exercise to lower depreciation by ~RM30mil. This is on top of its recent staff retrenchment exercise which would result in savings of ~RM65mil p.a.; this will partially mitigate earnings weakness from the two segments.

- Meanwhile, the group’s firm order book remained relatively unchanged QoQ at RM25.8bil, with optional extension of up to RM13.3bil. The group now trades at an FY15F PE of 16x.

Source: AmeSecurities Research - 28 Aug 2015