• 3Q20 core net profit of RM83m missed our expectation with deviation coming from weaker than expected FPO margin and consecutive quarter of associate losses
• Operationally, FPO profit fell qoq on Kraken’s planned maintenance shutdown and OMS losses widening
• Reiterate Buy with a slightly lower target price of RM0.36 (from RM0.39)

Margins disappoint

3Q20 revenue grew by 7% yoy to RM564m, attributable to a 27% improvement in OMS contribution and 4% increase in FPO revenue on the back of better FPSO Olombendo and Kraken performances. While 9M20 core net profit of RM301m (+33% yoy) made up 73% of our previous forecast, we deem it a slight miss with deviation coming from weaker-than-expected margins and consecutive quarters of associate losses. In terms of operating cash flow, 3Q saw a strong turnaround with 9M20 registering a 19% yoy improvement. This led to its overall net debt falling by 10% and lower net gearing of 2.58x (3Q20: 2.8x). Investors will find comfort that no large impairments are to be expected in 4Q20.

Kraken underwent maintenance shutdown in 3Q20

Sequentially, 3Q20 revenue fell 7% as FPO revenue fell by 10% owing to Armada Kraken’s planned maintenance shutdown. As a result, FPO operating profit fell 23% qoq. We gather that any planned maintenance exercise are often reimbursable through a provided allowance, but BAB has fully utilised the amount prior to this, and hence its FPO profit was affected. The 3 consecutive quarters of associates/JV losses was one of the main reasons for the earnings miss, due to recognition of DTL in 1Q, Sterling I extension study costs in 2Q and ONGC 98/2 related fee in the recent quarter.

Still underappreciated and undervalued – reaffirming BUY

We lower our 2020-22E EPS by 6-7% to factor in lower FPO margins and tweak associate contributions. Our new target price of RM0.36 (from RM0.39) offers potential upside of 36% from the current levels. In our view, BAB’s recent operational recovery is still underappreciated by investors. We expect to see a valuation re-rating once execution and earnings delivery becomes more consistent. Our target price implies 5.4x 2021E PER, representing a 33% discount to historical PER pre Kraken impairment. We also favour BAB given its resilient earnings under current low oil price environment, backed by its long-term FPSO contracts. Downside risks include weaker OSV fleet utilisation and termination of existing FPO contracts.

Source: Affin Hwang Research - 20 Nov 2020