Bumi Armada’s (BAB) 4Q18 result sent a rather mix signal. The positives included earnings that were in line, an unlikely right issues while a debt refinancing seems close. However, sentiment was dragged down by the huge impairment. We cut our earnings to factor in the weaker OMS segment in 2019. Accordingly, we lower our target price 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 negotiations 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 its renewal in August-18. Kraken also saw a lower uptime as a result of extreme weather in the North Sea over November and December, resulting in a RM25m decline in revenue. Notwithstanding, core net profit increased 7% qoq driven by a RM17m variation order 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 having produce crude that had not met the quality standards required, which resulted in a potential contingent liability required in the future. This latest impairment was to reflect the lower uptime throughout the firm contract period. Management guided that they adopted a prudent approach to assess the impairment, and as such there’s a probability of a partial write back.

Status of Refinancing

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

Source: Affin Hwang Research - 4 Mar 2019