KEY INVESTMENT HIGHLIGHTS

• Bumi Armada’s 3QFY19 normalised earnings grew by +18.0%yoy to RM71.6m

• Better revenue from Armada Kraken FPSO cushioned lackluster OMS performance

• Five OSV vessels sold off during the quarter

• Current orderbook at RM18.5b, with optional extensions worth up to RM10.0b

• FY19-20F earnings estimates maintained

• Maintain BUY with a revised TP of RM0.56 per share

BAB’s 3QFY19 normalised earnings grew +18.0%yoy to RM71.6m. Bumi Armada Berhad’s (BAB) 3QFY19 reported earnings came in at RM151.5m. However, its normalized earnings - excluding one-off gains of RM81.8m from the disposal of joint ventures and property, plant and equipment which includes the recently announced disposal of Armada Perdana; came in at RM71.6m. This brings its 9MFY19 cumulative earnings to RM212.0m which is within our but above consensus’ full-year earnings estimates at 77.2% and 83.2% respectively. Comparing against 3QFY18, revenue was lower by - 10.2%yoy whilst earnings grew by +18.0%yoy respectively. Meanwhile on a quarterly sequential basis; revenue and earnings declined marginally by -1.5%qoq and -8.5%qoq respectively. This was primarily attributable to: (i) higher revenue recognition coming from Armada Kraken FPSO; (ii) improved vessel utilization rates as well as; (iii) higher share of results from joint ventures.

FPO (previously FPSO & FGS) segment. The segment’s revenue declined by -10.2%yoy mainly attributable to certain charters where third party vessels were used which resulted in the Group reporting revenue net costs for these charters. However, the decline was offset by higher contribution from Armada Kraken FPSO. Correspondingly, segment profit grew by >100%yoy to RM226.1m due to the better revenue recognition. Meanwhile, on a quarterly sequential basis; the segment’s results decreased by -18.8%qoq to RM226.1m mainly arising from Armada Olombendo FPSO’s one-off discount obtained from vendors on costs incurred during the conversion phase of the vessel in 2QFY19.

OMS segment. The segment continued its lackluster performance with revenue decline of -59.4%yoy mainly due to the completion of the LukOil project in the Caspian Sea back in December 2018. However, segment profit improved marginally by +2.7%yoy to RM45.8m attributable to improved utilization rate during the quarter which was at 58% during the quarter. This is as opposed to 43% utilization rate recorded in 3QFY18. Additionally, BAB also sold off five (5) of its OSV vessels during the quarter which brings its number of OSV vessels sold to-date to 11. Therefore, its total remaining vessels are now down to 32.

Orderbook amounts to RM18.5b as of September 2019. BAB’s firm contract orderbook as at end-September 2019 amounts to RM18.5b. Out of the RM18.5b, RM17.6b or 95% is attributable to FPO segment. For certain firm contracts, upon expiration contains options to extend these contracts which are renewable on an annual basis with a total potential value of RM10.0b over the entire optional extension period. For the optional extension; RM8.8b or 88% is attributable to the FPO segment while the balance of 12% is expected to come from the OMS segment.

Going forward. Management disclosed that it is currently actively seeking new contracts for its two (2) Subsea Construction vessels in the Caspian Sea under its OMS business. Furthermore, the Group will remain focused on improving operational performance, financial efficiencies and monetization of assets which we opine will result in more sales of its idle OSV vessels.

Earnings impact. We are making no changes to our FY19-20F earnings projections at this juncture as we opine that BAB is on track to meet our earnings estimates.

Maintain BUY with a revised TP of RM0.56. Post earnings announcement, we are maintaining our BUY recommendation on BAB with a revised target price of RM0.56 (from RM0.38 previously). Our TP is premised on a revised PER20 of 11.0x pegged to an unchanged EPS20 of 5.1sen. Our PER revision is premised on our anticipation of further improvements in its OMS operating business following potential contract wins in the Caspian Sea as well as; further disposal of idle and unused vessels which in turn will improve earnings visibility for the Group overall. Furthermore, we remain positive on the growing contribution from its FPO segment which has seen commendable improvement since earlier this year attributable to the better contribution from Armada Kraken. Its OMS segment has also recorded highest utilization rate throughout the year during the quarter at 58% vs 43% in 3QFY18 which we opine will continue to assist in uplifting the segment going forward.

Source: MIDF Research - 25 Nov 2019