Bumi Armada’s (BAB) 3Q19 results beat expectations as FPSO Kraken continue to operate smoothly with the water filtration issue resolved earlier than guided and the OMS segment turned profitable with an improving outlook. Hence, we raised our 2019-21 EPS forecasts by 8- 12%, and the 12-month target price to RM0.62. We reiterate our BUY rating.

3Q19 Earnings Beat Our Forecast by 13% and the Consensus by 7%

3Q19 core net profit grew 36% qoq to RM87m given the OMS segment reported a profit turnaround and the stronger JV profit benefiting from a tax exemption. The strong core earnings were dampened by higher finance costs (~RM15m) following the completion of a corporate debt restructuring exercise. We expect BAB’s cost base to be lower by RM20m per quarter moving forward, following the disposal of FPSO Perdana which should help support earnings.

Improving OMS Outlook

BAB currently has 32 vessels (including the 3 ICE class) after disposing 5 vessels in 3Q19. The group is in the midst of deploying another unit back to Malaysia on top of the 12 units currently operating as domestic activities and rates improve. The OMS segment turned profitable in 3Q19 vs a RM11m loss in 2Q19 as OSV utilisation rate improved from 51% to 58%. There are no updates on its SC vessels which are still actively pursuing new contracts.

Skeptism on Kraken Should Finally Lift

After solving the problem with FPSO Kraken’s power generator, the group has successfully fixed the water filtration issue earlier than initially guided for 2020. Management shared that not much rectification work is needed from this point onwards, and aims to sustain the current high efficiency. In our view, this is positive as it suggests that the Kraken drama is finally over. The current two overhangs, if lifted, should lead to a re-rating of the stock, in our view: the reclassification of the RM1.48bn Kraken debt, which should be happen in the coming months; and the write-back of impairments. Management indicated that it is not in a rush to do the latter, but the current stable operation suggests that one could be in sight soon.

Raising Profit Forecasts on Better OMS Outlook

We raise our FY19 EPS forecast by 8% to factor in the stronger JV profit as a result of the one-off tax exemption benefit for India FPSO Sterling I and II in 3Q19. We also raise our FY20-21 EPS forecasts by 10-11% to reflect a better improvement for the OMS segment by imputing a higher fleet utilisation rate (from 55% to 60%) and DCR (from US$1.00/bhp to US$1.20/bhp), and also factoring in our new USDMYR assumption (now at 4.15/4.10). However, our revised profit forecasts have yet to fully reflect the likely cost savings from FPSO Perdana, suggesting potential earnings upside.

Maintain BUY

We believe that BAB’s valuation has room to further re-rate in the coming quarters, driven by positive newsflow surrounding the Kraken debt reclassification, and Woodside court case (latest by June 2020). As the deadline nears for the latter, we have factored in a favourable court judgement with BAB claiming back half of the original damage of US$280m (RM1.16bn). We raise our 12-month SOTP-based target price to RM0.62 (from RM0.45), which implies a forward PER of 10x, still at a considerable 20% discount to its valuation prior to the first Kraken impairment back in Aug-18.

Source: Affin Hwang Research - 25 Nov 2019