• 1H22 core net profit was 64% of our previous FY22F forecast and 56% of Bloomberg consensus, above expectations on additional revenue sources.
• Upgrade from Hold to Add, as the risk of a rights issue has dropped, and BAB is in a good position to secure the Cameia FPSO project from TotalEnergies.
• We raise our TP to 55 sen on the back of a lower 20% discount to SOP (from 30% discount) to reflect the lower risk of a rights issue.

Highest-ever quarterly profit in BAB’s history in 2Q22

2Q22 core net profit of RM261m (+42% qoq, +24% yoy) was Bumi Armada’s (BAB) highest-ever quarterly profit, the fruit of many years of effort to strengthen daily operations and reduce debt. The FPSO business was stable, FPSO Kraken enjoyed higher uptime performance, and BAB booked in one-off engineering design revenue for an FPSO in 2Q22. BAB also made greater progress with its ongoing Caspian Sea job, which has been keeping the Armada Installer and Armada Constructor employed since Jun 2022 (after being out of work since Dec 2018). In addition, in 2Q22, BAB enjoyed higher share of associate profits qoq, due to reversal of tax liabilities, and RM34m in forex gains, on the translation of intercompany receivables given the stronger US$ against the ringgit (vs. forex loss of RM3m in 1Q22). Reported net profit in 2Q22 was RM186m, lower than the core net profit of RM261m, on account of an RM88m impairment of a lease receivable related to the charter of the FPSO Claire (which was finally written off, as BAB lost the case in the Australian Court of Appeal in Jun 2022), but which has no relevance to cashflow. On a positive note, BAB successfully collected RM23m of previously written-off bad debts related to the OSV business.

Conditions are ripe for a substantive re-rating

The immediate outlook for BAB looks good. BAB said at its analyst briefing that there were plenty of pipelay jobs available in the Caspian Sea in view of high oil prices, and it is confident of securing additional work once the existing job is completed in 3Q22F. On the FPSO front, its 30%-owned FPSO Kakinada 98/2 project in Singapore is 90% complete as at 30 Jun 2022, and should sail away to India in 4Q22F, according to BAB. Based on industry reports, we believe that BAB had bid for Eni’s Agogo FPSO build-own-lease project and TotalEnergies’ Cameia FPSO engineering, procurement and construction (EPC) project, both offshore Angola; BAB stands a good chance to secure the latter contract, in our view, as competition is limited. If BAB wins the Cameia FPSO project, it will only need working capital funding, because TotalEnergies has tendered out the work as an EPC project, meaning that TotalEnergies will bear the capex and the FPSO contractor merely provides the EPC services which will not require substantial equity capital; this reduces the risk of a rights issue in the foreseeable horizon, in our opinion. On this basis, and in view of the 11% drop in BAB’s share price over the past three months, we upgrade to Add. Potential re-rating catalysts include a possible Cameia FPSO contract win and new Caspian Sea jobs. Downside risk: a potential rights issue, should BAB secure a much larger build-own-lease FPSO project down the road.