We hosted Bumi Armada (BAB) management at our office which garnered a good turnout of over 20 institutional clients. The main concerns highlighted by investors were the sustainability of Kraken’s improved performance and its debt issue, funding for the recently awarded 98/2 ONGC project, and the Claire FPSO court case. We came away feeling slightly more confident that the worse could be over for the company. Positively surprising was the cost savings from FPSO Perdana disposal, which is larger than we expected, and not fully factored in our FY20E numbers. Maintain BUY; target price RM0.34.

Catalyst #1: Kraken Steady, Targets to Reclassify Loan Before End-19

According to last week’s EnQuest update, FPSO Kraken’s uptime was substantially higher in 2Q19 at 80% (vs 1Q19: 55%) following the resumption of two-train operations. The field’s average production in 6M19 stood at 32,776bpd, in line with its full-year 30,000-35,000bpd target. There was a pipework repair on FPSO Kraken in July and August 2019 that required a shutdown, but earnings are unlikely to be affected as this is within the allowable maintenance days. Management targets to reclassify its RM1.57bn term loan by end-19, which has been categorized under shortterm liabilities since 4Q17 (amount then was at RM2.1bn). To recall, BAB booked a RM480m quality-related impairment in 2Q18 and RM1.2bn uptime impairment in 4Q18. While already showing improvement in terms of higher uptime, impairment write-backs are not expected to materialize over the next 6-12 months, which we believe will likely only be considered after fixing the water filtration issue.

Catalyst #2: Perdana Cost Savings Bigger Than Expected

We were surprised that the expected cost savings from the recent FPSO Perdana disposal was guided to be significantly greater than market expectations. We had earlier estimated RM10m per annum of maintenance cost savings, but this was guided by management to be around RM70m (RM6m per month from crew maintenance and insurance). This is not fully factored into our numbers and may provide further earnings upside to our existing FY20E estimates and beyond.

Catalyst #3: Claire’s court case decision earliest by end-19, latest 1H20

The earliest a court case decision on FPSO Claire will be made known would be by end-19, where BAB is claiming for US$280m of damages. However, we understand that both parties have a right to appeal once, which would delay any positive outcome by another 6 months (June 2020) However, management believes that a full 6-month delay is unlikely.

Source: Affin Hwang Research - 13 Sept 2019