First-time losses at core level

Bumi Armada (BAB) reported its weakest ever quarterly results with core net losses at RM6.0m, dragging down the 9M16 core net profit to RM92.5m. 9M16 revenue and core net profit achieved 63% and 49% of our full-year estimates. Deviations against our forecasts were mainly due to the lower conversion activities from Armada Olombendo and Kraken as well as reduced contributions from both Armada Perdana and Perkasa (APP). We cut our FY16-18E EPS by 12.1%-39.3%. Maintain HOLD with lower TP of RM0.60 following the lower EPS forecast and our roll forward in the valuation year.

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Higher T&I activities offset lower FPSO and OSV contribution

BAB reported its first core net losses of RM6m in 3Q16 after adjusting for various one-off items, namely the RM4.2m impairment provision for AFS financial assets, RM79.6m allowance for doubtful debt, RM4.5m forex losses, RM1.4m retrenchment expenses and RM0.9m FV losses on derivatives. The 9M16 revenue contracted 23.9% mainly due to: (1) the loss of Armada Claire contributions, (2) the lower contribution from APP, (3) Armada Olombendo and Kraken nearing the tail end of their conversion stage, and (4) weaker OSV utilisation. However, the negative impact was cushioned by higher activities from the LukOil project in the Caspian Sea which saw offshore marine services (OMS) segment revenue grow by 9.0% yoy.

3Q16 plunged into core net losses

BAB posted core net losses of RM6m in 3Q16 versus the core net profit of RM61.4m in 2Q16. Breaking down by segment, FPSO registered 25.5% lower revenue qoq as a result of the completion in conversion activities for Armada Olombendo. This was partially offset by higher OMS revenue which grew 5.8% due to higher contribution from LukOil project and Armada Installer. JV contribution were also 60.7% lower due to lower conversion contribution from Armada Madura and weaker operations from Armada Sterling II.

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Earnings revision

We cut our FY16E EPS by 39.3% to reflect the: (1) slowdown in conversion activities, (2) removal of APP revenue contribution as only the operating cost is being covered at present, and (3) lowering of our FPSO and OMS margin estimates. For FY17-18E, we made rather similar adjustments by removing the APP contribution and reducing our margin estimates, leading us to cut our EPS forecasts by 16.9% and 12.1%, respectively.

Key highlights from 3Q16 analyst briefing

During the 3Q16 analyst briefing, management was rather cautious guiding that the maiden earnings contribution from three FPSOs (Olombendo, Kraken and Madura) should commence by 1Q17. There is no update on Armada Claire litigation case, while for both its Nigerian assets, APP continues to operate at a cash flow breakeven level (meaning that clients are merely covering the operating cost of both FPSOs). While management did not shed more light on the allowance for doubtful debt of RM79.6m recognised this quarter, we reckon that this could be related to APP. Recall that in 4Q15, management had recognised a RM183m allowance for doubtful debt. This continues to raise red flag in terms of cash flow recoverability given BAB’s higher 3Q16 net gearing of 1.38x (vs. 0.9x in 4Q15). Armada LNG Malta, Olombendo and Kraken are in the midst of being mobilised for their respective destinations. Management guided that hook-up commissioning generally takes an average of 2 months, hence it is targeting earnings and cash flow to start by late 1Q17. Besides that, management is currently pursuing a few FPSO tenders in India, Vietnam, Nigeria, Ghana and Brazil, and sounded confident that these will be awarded in 2017.

Maintain HOLD

We can expect earnings to be muted for the next two quarters as the FPSOs are being mobilised for their respective destinations. We cut our FY16-18E EPS by 12.1%-39.3% and derive our new SOTP-based 12- month TP of RM0.60 (from RM0.64 previously) following our roll forward of the valuation year. Maintain HOLD.

Risks

Key upside risks include: (1) stronger-than-expected OSV fleet utilisation, (2) new FPSO contract wins, (3) APP starting to recognising revenue, and (4) an increase in the T&I activity level. Downside risks include any unforeseen operational hiccup with the new FPSOs.

Source: Affin Hwang Research - 24 Nov 2016