Results

• Lower profit - Bumi Armada posted a net loss of RM96.7m in 3Q16, compared to a net loss of RM518.3m in the previous quarter and a net profit of RM70m in 3Q15. The latest loss was due to lower revenue from Floating Production Storage and Offloading (FPSO), net allowances for doubtful debts of RM79.6m and impairment loss on available-for-sale financial assets of RM4.2m.

• Core earnings fall into the red - Excluding the exceptional items, Bumi Armada posted a core net loss of RM12.9m which is lower than core profits of RM57.1m in 2Q16 and RM82.2m in 3Q15.

• FPSO revenue decline – Quarterly revenue declined 33% YoY and 6% QoQ to RM377.5m as contribution from the FPSO segment declined 68% YoY and 25% QoQ to RM116m mainly due to lower conversion activities as the Eni 1506 FPSO projects nears completion.

• OMS revenue continues to improve – On the bright side, revenue from Offshore Marine Services jumped 35% YoY and 6% QoQ to RM261.5m due to higher contribution from the LukOil project in Caspian Sea and Armada Installer despite a flat utilisation rate from Offshore Support Vessels (OSV) at 55%.

• Armada Claire lawsuit ongoing – Bumi Armada had filed court proceeding with the Supreme Court of Western Australia to claim US$283.5 million from Woodside Energy Julimar after the latter had cancelled the contract. We have yet to factor in any potential compensation from the court case.

• Other FPSOs progressing well – Despite the cancellation of Armada Claire and reduced contribution from Armada Perdana and Armada Perkasa, Bumi Armada have delivered the Kraken (North Sea), Olombendo (Angola) and LNG (Malta). The Madura FPSO is expected to be delivered in 4Q16.

• Strong orderbook - Orderbook remains steady at RM24.1bn (FPSO: RM22bn, OMS: RM2.1bn) with another RM12.9bn worth of potential extension. This will sustain the group’s earnings for the next few years with FPSO contracts ranging from 4 to 12 years. Going forward, Bumi Armada is eyeing several new FPSO jobs to replenish its order book, namely ONGC Kakinada (India), Repsol CRD (Vietnam), Eni Zaba Zaba (Nigeria), Hess (Ghana) and Petrobras Sepia (Brazil).

Earnings Outlook/Revision

• Results below expectation – 9M16 normalised net loss of RM12.9m came below our expectation of our full year net profit estimate of RM228.9m. 9M16 revenue also came below forecast after making up 55.8% of our full year forecast.

• Forecast lowered – We are slashing our FY16 net profit and sales forecasts by 33% and 30% respectively as the newly completed FPSOs will only start contributing significantly in FY17 after reaching their respective oil fields. FY17 EPS and sales forecasts are also reduced by 12.3% and 12% respectively to reflect the progress of the FPSO/FGS projects, which are expected to lift the company’s earnings significantly by 2Q17.

Valuation & Recommendation

• Upgrade to Buy call with a higher target price of RM0.91 as we roll over our valuation to FY17 EPS pegged with a target PER of 15x. We think the premium PE valuation is warranted given its huge orderbook and long term prospects in FPSO which could keep the company busy for the next few years. Despite the potential upside in share price, near-term sentiment will remain challenged until earnings improvement kick in next year.

Source: JF Apex Securities Research - 24 Nov 2016