INVESTMENT HIGHLIGHTS

• Bumi Armada’s (BAB) 2QFY18 reported earnings slumped to -RM585.5m

• Normalised 2QFY18 earnings in the red at -RM106.5m

• Orderbook stands at RM20.2b (from RM20.7b)

• OSV utilisation rate in 2QFY18 struggling at 39%

• Downgrade to Neutral with revised TP of RM0.58

Performance below estimates. BAB’s 2QFY18 reported earnings slumped to -RM585.5m. Excluding exceptional items, i.e. impairments on Armada Kraken (RM477.2m) and Armada Gema (RM1.7m) FPSOs, BAB’s normalised earnings was in the red at -RM106.5m. Its 6MFY18 normalised earnings is recorded at -RM37.6m which is below ours and consensus’ FY18 full-year earnings estimates.

FPO (previously FPSO & FGS) segment. Segment revenue grew by +32.2%yoy to RM446.5m while segment profit increased by +14.1%yoy to RM166.2m. The encouraging numbers is largely attributable to higher contribution from Armada Olombendo FPSO and Armada Kraken FPSO.

OMS segment. The Offshore Marine Segment (OMS), an amalgamation of the offshore support vessel (OSV) and Transport & Installation (T&I) segments suffered revenue decline of -41.8%yoy to RM207.6m while profit was registered at RM73.8m. This is mainly due to low OSV utilisation rates which offset the higher contribution from the LukOil project in the Caspian Sea. Combined OSV utilisation rate declined to 39% in 2QFY18 compared with 40% in 1QFY18.

Impact on earnings. Due to the RM100m impact expected from the amendment agreement two entered into on the acceptance of Armada Kraken with EnQuest, as well as a further slowdown in OMS segment, we are revising our FY18 and FY19 earnings downwards to RM112.5m and RM225.9m respectively.

Orderbook. The company’s latest orderbook as at 30 June 2018 stands at RM20.2b (compared with RM20.7b as at 31 March 2018) with 93% of the orderbook consists of FPO contracts (RM18.8b) while the remaining 7% are OMS jobs (RM1.4b). The optional extension orderbook stands at RM11.8b.

Downgrade to NEUTRAL. We are downgrading BAB to NEUTRAL (previously Trading Buy) with a revised TP of RM0.58 per share. Our valuation is based on PER19 of 15x pegged to EPS19 of 4.0sen. We opine that this is fair given that the OMS could face further headwinds due to (i) the oversupply state in the OSV segment (especially the higher brake horsepower vessels), and (ii) the recent increase in oil price is not expected to translate into offshore activities such as exploration and drilling. That said, we opine that the expected continued increase in contribution coming from Armada Olombendo and Armada Kraken FPSOs will assist in mitigating the shortfall going forward.

Source: MIDF Research - 30 Aug 2018