Bumi Armada’s (BAB) 2019 core earnings were in line with expectation, though Claire’s impairment was a negative surprise. That aside, Kraken continued to operate at high efficiency with its debt successfully reclassified as long-term and an overall improved cash flow position during the quarter. We cut our 2020-21E EPS by 10% to reflect the higher-than-expected depreciation costs following the company’s more aggressive depreciation policy on the OMS vessels. We also excluded the Woodside claim from our valuation. All in, we lower our 12-month target price to RM0.51, but maintain our BUY call.

Earnings Within Our and Consensus Estimate

Stripping out the RM234m Woodside impairment charge and RM44m relating to the OMS segment, BAB’s 4Q19 core profit declined 48% yoy to RM50m. 2019 core profit declined 25% yoy to RM277m, within our and consensus estimates. Earnings growth moving forward will likely be supported by stabilisation of FPSO Kraken (started 2H20) and full-year favourable cost savings impact from the disposal of FPSO Perdana (estimated to be RM72m per year).

Yesterday’s Sell-down a Reaction Over RM234m Woodside Impairment

BAB recognised 3 impairment charges during the quarter: 1) RM44m impairment for the OMS segment (RM42m for Caspian Sea vessels due to a delay in securing new contracts and RM2m on the disposal of OSV). This impairment was widely expected by the market. However, the market was taken by surprise by the FPSO Claire impairment which amounted to RM234m, following the court’s decision to dismiss BAB’s claim against Woodside for early termination of FPSO Claire. BAB is appealing the decision but has decided to provide for the amount to be prudent. BAB has written down most of contract sum with a residual accrued lease rental of US$20m left in its book.

Lower TP After Excluding the Woodside Claims Money

Though earnings are in line, we lower our 2020-21 EPS forecasts by 10% to factor in higher depreciation for its Caspian vessels, for which the useful life has been shortened from 15 years to 10 years, with the intention to dispose. We also introduce our 2022 forecasts. We lower our SOTP-based target price to RM0.51 (from RM0.62) after excluding the potential recoverable amount from the Woodside court case from our valuation.

Source: Affin Hwang Research - 28 Feb 2020