Bumi Armada (BAB) reported 3Q18 core PATAMI of RM90m (+35% yoy), which was in line with our and consensus estimates. Operating cash flow in this quarter doubled to RM251m compared to previous quarter and free cash flow was strong, as capex spending dwelled off. We maintain our BUY call but lower our target price to RM0.55.

Focus on Earnings and Cash Flow

BAB recognised another impairment amounting to RM564m in 3Q18, which related to its OMS vessels. Nevertheless, looking past the impairment, core PATAMI came in at RM90m (-0.5% qoq, +35% yoy) which came in line at 78% of our full year forecasts. Cash flow also improved to RM251m (+8% yoy). FPSO Kraken, which received final acceptance on 7 September 2018 should see the full finance lease impact in the upcoming 4Q18.

Earnings Were Flattish Qoq

Overall 3Q18 revenue fell by 10% qoq to RM588m following the FPO and OMS revenue decline of 9% and 12%, respectively. This was as a result of FPSO TGT1 contract renewal beginning August 2018 and an one-off VO recognised for FPSO Olombendo in 2Q18, coupled with lower contribution from Armada Installer following the work completion in Turkmenistan. Nevertheless, core PATAMI was relatively flat at RM90m supported by better JV contribution due to an one-off accrual provision.

Update on Debt Refinancing

On it’s US$500m corporate loans, BAB has repaid part of it (US$120m) back in October 2018 and is in the midst of discussing the extension for the remaining portion. We understand that there will be no more loan repayments (initially next one to due in December 2018) until an extension has been secured.

Earnings Cut; But Remain BUY

No changes to our FY18 forecast, but we lower FY19-20E forecasts by 10% factoring in a lower subsea vessels utilization following the Lukoil contract expiry with Petronas Carigali in Turkmenistan. In our view, share price has been overly punished of late and we believe the worst is over with recovering earnings and cash flow prospect as seen in the recent results. The next catalyst depends on the timing of debt refinancing which was guided to be by 1Q19. We continue to reiterate our BUY call on BAB with a lower SOTP-based TP of RM0.55.

Source: Affin Hwang Research - 26 Nov 2018