What’s New

• Earnings set to rebound in FY17 on new FPSO deployments

• OSV segments remain a drag amid challenging environment

• Cut FY17/FY18F earnings by 69%/17%

• Downgrade to HOLD with lower TP of RM0.75

Challenging environment still awaits

Rebound in FY17 but challenges remain. We downgrade our recommendation on Bumi Armada (BAB) to HOLD following recent price appreciation. FY17 will start on a clean slate following a massive kitchen sinking exercise in 4Q16. Earnings will be driven by revenue boost from the deployment of Armada Olombendo and Kraken FPSO while lower amortisation is expected following asset impairment in FY16, particularly for the OSV segment.

Turnaround for the OSV business is the swing factor though still elusive for now. Low vessel utilisation rate amid an oversupplied OSV market will continue to be a drag on BAB’s OSV business. We expect losses will narrow in FY17 on lower amortisation while we conservatively assume no pick up in utilisation. That said, in the event of a turnaround, the OSV business will become a major re-rating catalyst for BAB.

Long term earnings visibility underpinned by RM25.6bn orderbook. Its massive orderbook will slowly be converted into earnings and cash flow upon completion of its FPSO conversions. Its current orderbook comprise 92% FPSO, while Offshore Marine Services (OMS) segment makes up the remaining 8%. Extension options are valued at RM13.9bn – 90% FPSO and 10% OMS segments.

Valuation

Our SOP-based target price is lowered to RM0.75 which is derived using DCF valuation for the FPSO business (WACC: 7%) and 10x EV/EBITDA multiple for the Transport & Installation (T&I) business. We did not ascribe any value to the OSV segment due to its persistent losses and we believe that the OSV market will continue to see weak demand in the current environment.

Key Risks to Our View

Delay in achieving first oil and likelihood of contract terminations. We do not rule out any potential termination of Armada’s other FPSOs, especially in current volatile market. Despite the recovery in prices, oil companies continue to remain prudent in 2017, capital expenditure budgets expected to see only marginal increases focusing on existing or approved projects on-stream with a lack of new exploration activity.

Source: Alliance Research - 2 Mar 2017