Bumi Armada (BAB) 4Q18 result was a mix signal – profit in line, hinted on no right issues, debt refinancing seems close to a deal were among the positives, but sentiment was dragged down by the huge impairment. We cut our earnings to factor in the weaker OMS segment in 2019. Target price lowered to RM0.28 (from RM0.55). The success in securing the ONGC KG/DWN/98-2 FPSO with partner Sharpoorji would be an immediate catalyst for the stock. Maintain BUY with the underlying belief that the current talk with bankers would end on a positive note.

Earnings Inline

4Q18 results was in line with our expectation at 105% of our full year estimates. Revenue was down 2% qoq due to lower TGT1 bareboat charter (BBC) rates after getting renewed in August-18. Kraken also saw a lower uptime as a result of extreme weathers in North Sea over November and December period, resulted in RM25m lower in revenue. Notwithstanding, core net profit increased 7% qoq driven by RM17m variation orders from LukOil project (the last of it).

FPSO Kraken’s Impairment

Following FPSO Kraken’s impairment of RM479m made in 2Q18, BAB recognized another impairment of RM1.2bn in 4Q18. The impairment made earlier was due to Kraken’s not producing up-to-standard quality of crude, which resulted in potential contingent liability made in the future. Elsewhere, this latest impairment was to reflect the lower uptime throughout the firm contract period. Management guided that they have took a very prudent approach to assess the impairment, and as such a probability of partial write back.

Status of Refinancing

Management reassured that the talk with bankers on the US$380m debt refinancing have been positive, but guided that it should only be resolved by early April, from earlier guided March. The recent impairment exercise also resulted in a breach of covenant for its RM1.5bn sukuk, which was subsequently reclass to current liability in its latest accounts. This sukuk was originally only falling due in 2024, which Bumi is now also in discussing with bond holders.

Source: Affin Hwang Research - 1 Mar 2019