Results /Briefing

Below Expectation: 1QFY14 PATAMI fell 41% yoy and 27% QoQ to RM65m, making up 10% and 11% of HLIB and consensus full-year estimates, respectively.

Deviations

Mainly due to change in earning recognition from operating leasing to finance leasing for its Kraken and C7 vessels coupled with lower activities in its T&I segment.

Dividends

None.

Highlights

1QFY14 revenue fell due to change in revenue recognition from operating leasing to finance lease for certain FPSOs, lower utilisation from OSVs and lower activities in T&I. As a result, earnings dropped 27% QoQ.

OSV revenue decreased QoQ due to lower utilisation of older vessels and weather downtime. Overall, vessel utilisation has dropped from 81% to 70%. The fleet renewal strategy will raise utilisation back going forward. T&I segment remain weak mainly due to winter seasons in the Caspian Sea and completion of Armada Hawk charter.

After the RM9.5bn contract award for Angola project, the total order book has increased to RM31.6bn. We understand the company has submitted 4 bids for FPSOs in Ghana, Nambia, Mexico and Indonesia with capex worth US$3bn. In addition, the company is working on 6 more bids with a combined capex of more than US$10bn.

Given the robust outlook and number of projects to tender, Bumi Armada has proposed 1 for 2 rights and 1 for 2 bonus issue exercises which are expected to raise about RM2.2bn war chest and to be completed by 3Q14. Gearing ratio will fall from 1x to 0.7x. Assuming right price of RM1.52 per share (35% discount to the theoretical ex-right price of RM2.33) FY15 EPS will be diluted by 33%. However, we believe the new FPSO projects will help to offset the dilution from the cash call.

FSRU and FLNG segments provide new growth opportunity going forward. The company will focus on small-scale FSRU and was a short listed bidder for several FSRU projects in 2013. We have not captured any contribution from FSRU projects in our earning assumptions. This will be the wildcard for the company.

Risks

• Increased competition as new players enters the market.
• Execution risk, including oil spills and their clean-up costs.
• Unusual high portion of vessels dry docking or under repair.

Forecasts

FY14 and FY15 earnings adjusted downward by 20% and 23% respectively to reflect the change in earnings recognition from operating lease to finance lease. However, the underlying cash flow for the FPSO projects remains unchanged.

Valuation

We continue to like the company’s prudent approach in tendering projects and outstanding execution capability. Hence, we maintain our BUY call with TP reduced from RM4.87 to RM4.70 based on SOP valuation method (vs. P/E method previously) following the earnings revision

Source: Hong Leong Investment Bank Research- 26 May 2014