INVESTMENT HIGHLIGHTS

• Bumi Armada’s (BAB) 3QFY18 reported earnings slumped by >100%yoy to –RM513.4m

• Normalised 3QFY18 earnings at RM71.2m

• Firm orderbook stands at RM21.0b (from RM20.2b)

• OSV utilisation rate in 3QFY18 increased to 43%

• Maintain Neutral with revised TP of RM0.35 per share

Normalised earnings below estimates. BAB’s 3QFY18 reported earnings turned red to –RM513.4m. Excluding exceptional items ie. impairment on its OSVs (RM522.1m) and FPO business (RM41.4m) FPSOs, BAB’s normalised earnings declined by -43.3%yoy to RM71.2m. 9MFY18 normalised earnings came in at RM23.0m which is below ours and consensus’ FY18 full-year earnings estimates.

FPO (previously FPSO & FGS) segment. Segment revenue was flat year-over-year at RM405.7m while segment profit declined by - 6.7%yoy to RM196.5m. The lacklustre numbers were largely attributable to lower revenue from Armada TGT FPSO after the signing of its extension agreement during the quarter.

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 - 23.6%yoy to RM182.3m while profits registered at RM44.6m. This was mainly due to lower contribution from Armada Installer following completion of work in Turkmenistan in 2QFY18. Combined OSV utilisation rate increased to 43% in 3QFY18 compared with 38% in 1QFY18 however, it did not translate to higher revenue due to persistently depressed charter rates.

Impact on earnings. Due to the impact from the two consecutive impairments as well as the persistent depressed charter rates for its in OMS segment, we are revising our FY18F and FY19F earnings lower to RM53.1m and RM136.3m respectively.

Orderbook. The company’s latest orderbook as at 30 September 2018 stands at RM21.0b compared with RM20.2b as at 30 June 2018. 93% of the orderbook consists of FPO contracts (RM19.5b) while the remaining 7% are OMS jobs (RM1.5b). The optional extension orderbook stands at RM10.3b.

Remaining USD380m debt to be restructured. Recall that, BAB has USD500m in term loan due for repayment by end of this year. The term loan which is due to be repaid in three tranches by end-2018, has been extended to May 2019. BAB is in the midst of restructuring the remaining term loan of USD380m, where the first tranche of USD120m has been repaid back in October 2018. Management disclosed that it is in discussions with its lenders on the potential term loan extension for the remaining two tranches that is expected to be concluded in 1QCY19. We understand that management expects the newly restructured debt to be able to match its future cashflow going forward.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on BAB with a revised TP of RM0.35 per share. Our valuation is based on PER19 of 15x pegged to EPS19 of 2.3sen. We opine that this is fair given that the OMS segment will continue to face headwinds due to the oversupply in the OSV segment (especially the higher brake horsepower vessels), and despite the increased in utilisation rate during the quarter; it is not expected to translate into higher revenue due to persistently depressed charter rates. Furthermore, two of its FPSOs i.e Armada Claire and Armada Perdana are currently not yielding due to issues facing the charterers. 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 - 26 Nov 2018