Bumi Armada (BAB) reported a core net profit of RM91.2m, which was within our expectation. With FPSO Olombendo achieving final acceptance recently on 17 May 2018, all attention will be on Kraken’s acceptance targeted by end-June, which would serve as a strong rerating catalyst. Maintain BUY with a lower target price of RM0.98.

Off to a Good Start

BAB’s 1Q18 core net profit came in at RM91.2m (+86.7% qoq, +38.6% yoy), which represented 20% of our and consensus forecasts. Revenue increased 48.5% yoy boosted by 90% bareboat rate recognition of FPSO Olombendo, while Kraken was recognising ~70% of bareboat rates during the quarter. In addition, 1Q17 earnings were also impacted by Kraken’s supplementary payment for the first oil delay. Equally important, operating cash flow position has improved 20% yoy, contributed by both new FPSOs and expected to be stronger upon Kraken’s final acceptance.

Stronger FPO Profit Offsets Weakness in OMS

Revenue fell by 9.3% qoq as a result of lower OMS contribution due to slow Lukoil activities. Nevertheless, management alluded that work scope for Lukoil project is expected to keep BAB busy for the rest of the year. Despite the revenue decline, EBITDA margin rose 8.4ppts qoq to 55.8% due to accounting adjustments whereby FY17 withholding tax was reclassified from tax expenses to cost of sales in 4Q17, and project management fee which was expensed previously was subsequently capitalised in 1Q18.

Positive 2H18 Outlook

We keep our earnings forecasts largely unchanged given the promising 2H18 outlook, as earnings momentum is expected to be lifted by Kraken, which is targeted to achieve client final acceptance by June-18. OMS utilisation is also looking at improvement, attributed to higher Lukoil activities in Caspian Sea.

Maintain BUY With a Lower TP of RM0.98

BAB remains as one of our top sector picks. We maintain our BUY call as we like the company for its appealing valuation and believe that stronger earnings and cash flow deliveries will help drive the share price. We lower our SOTP-based TP slightly to RM0.98 (from RM1.00) post housekeeping adjustments. Key risks to our view include: (1) weaker-than-expected OSV fleet utilization, (2) termination of existing FPSO contracts.

Source: Affin Hwang Research - 1 Jun 2018