Update

• Bumi Armada (BAB) announced an unplanned shut-in of the Armada Kraken floating production and offloading (FPSO) vessel after the failure of critical hydraulic submersible pump transformers.

• BAB expects a material financial impact as the shut-in and future reduced level of production meant that the bare boat charter contract revenue earned by the Kraken will be reduced. Currently, BAB is still assessing the impact.

• To recap, the Kraken FPSO agreement was signed with EnQuest in 2014 for a 8-year bareboat charter contract worth US$1.4 billion to operate in the North Sea. In 2016, BAB paid US$85 million to EnQuest following a mutual agreement due to the revised sail-away date of the vessel and the revised production date of the first oil in the first half of 2017. The Kraken achieved first oil in 2017 and final acceptance in 2018. It has 3 years remaining on the contract with an option for 17 annual extensions.

• Steady operations – Previously in its 1Q23 results briefing, the management updated that all FPSOs and floating storage units (FSUs) were operating near 100% capacity. BAB has sold its last offshore support vessel and Armada Claire FPSO with disposal gains to be recognized in 2Q23. Meanwhile, Bumi Armada’s 30%-owned FPSO, Armada Sterling V was moored at offshore India and is now preparing for first oil and is expected to start topline contribution this year.

• Strong orderbook – Orderbook stands at RM11.1b following a slight decline from RM11.7b in 4Q22 with potential extension worth RM9.3b. The FPSO orderbook can sustain the group’s earnings for the long term with three FPSO contracts expiring in 2024-2025 while another four contracts are in longer tenure.

Earnings Outlook/Revision

• Forecasts maintained – We are keeping our forecasts for FY23 pending update from the management on the financial impact.

Valuation & Recommendation

• Downgrade to SELL with a lower target price of RM0.48 (previously RM0.61) – Following the uncertainty on Kraken, we reduced our valuation to +1 std dev from +1.5 std dev on its 3-year average P/B and FY23f BVPS. We like the stock for its earnings momentum and continuous effort to lower gearing. However, we opine that the stock is fully valued at the moment and subject to rerating if it secures new FPSO contracts.

Source: JF Apex Securities Research - 6 Jun 2023