Bumi Armada’s (BAB) 1Q20 core PATAMI exceeded our and consensus expectations by 5-9%, but this was masked by another headline loss due to impairment on its OMS vessels. On the FPSO front, Olombendo’s lower operating costs helped drive margins, while revenue rose on continuous high uptime for Kraken. Upgrade to Hold from Sell with a higher target price of RM0.20.

Absence of Impairments Delivers Results Above Expectations

1Q20 core net profit grew 18% yoy to RM89m on the back of 1) 10% higher FPO revenue as a result of better Kraken uptime, and 2) 12ppts EBITDA margin expansion driven by RM43m lower FPSO Olombendo repair and maintenance costs. OMS segment losses widened to RM48m (RM26m loss in 1Q19), but FPO reported its strongest profit since 1Q18, which is a positive.

Associate Losses Due to One-off DTL Impact

We expect JV profit to normalize back to its ~RM30-40m level for the rest of 2020 after being impacted by a one-off RM36m deferred tax liability in 1Q20. Sterling III resumed its full operation in 1Q after experiencing a wax blockage in the gas treatment unit partly in 4Q19. This has led to an average 15% decrease in charter rates recognition in 4Q19.

Kraken’s Momentous Anniversary

1Q20 marked the fourth consecutive quarter FPSO Kraken has been operating with a high uptime, after resuming its two-train operation in 2Q19. Kraken-related loans amounting to RM1.3bn have also been reclassified back to non-current liabilities this quarter, which should alleviate investor concerns. A long-term re-rating catalyst lies in BAB’s decision to write back the impairment booked in 2Q18 and 4Q18, totaling RM1.7bn, as the FPSO is operating smoothly now.

Upgrade to Hold

We tweaked our forecasts slightly on housekeeping adjustments following the release of the 2019 annual report. We upgrade our rating to Hold (from Sell) after raising our SOTP-based target price to RM0.20 (from RM0.13), as we roll forward our valuation. At our target price, stock would trade at an implied P/BV of 0.3x. Key upside risks would depend on its two Caspian vessels securing a contract sooner and higher OSV fleet utilization. Downside risk include weaker-than-expected OSV utilization and termination of existing FPSO contracts.

Source: Affin Hwang Research - 1 Jun 2020