KEY INVESTMENT HIGHLIGHTS

• Bumi Armada’s 2QFY20 normalised earnings grew by +53.1%yoy to RM119.8m

• Better revenue from Armada Kraken FPSO cushioned lackluster OMS performance

• No new sale of OSV vessels during the quarter

• Current orderbook at RM17.2b, with optional extensions worth up to RM10.1b

• FY20-21F earnings estimates lifted by +19.6% and +19.2%

• Maintain BUY with a revised TP of RM0.65 per share

BAB’s 2QFY20 earnings grew +31.7%yoy to RM119.8m. Bumi Armada Berhad’s (BAB) 2QFY20 reported earnings came in at RM119.8m. This brings its cumulative 1HFY20 earnings to RM210.2m which was above our and consensus’ full-year earnings estimates at 70.0% and 73.5% respectively. Comparing against 2QFY20, revenue was higher by +13.3%yoy whilst earnings grew by +53.1%yoy respectively. Meanwhile on a quarterly sequential basis; revenue grew by +9.8%qoq whilst earnings increased by +32.5%qoq respectively. This was primarily attributable to improved vessel availability of Armada Kraken FPSO during the quarter under review. This was however; offset by: (i) lower revenue recognition from its OMS segment due to lower OSV utilization recorded for the quarter at 55% and; (ii) higher operating costs for Armada Olembendo. In addition, overall operating profit margin (ex-impairment) has also improved to 40% in 2QFY20 vs 37% in 2QFY19.

FPO (previously FPSO & FGS) segment. The segment’s revenue grew by +17.5%yoy mainly attributable to higher contribution from Armada Kraken FPSO arising from improved vessel availability. However, this was offset by higher operating costs from Armada Olembendo following higher maintenance costs incurred during the quarter. Correspondingly, segment operating profit grew by +53.1%yoy to RM250.1m due to the better revenue recognition. Similarly, on a quarterly sequential basis; the segment’s revenue and profit increased by +9.8%qoq and +32.5% respectively mainly due to gains arising from translation of intercompany balances denominated in foreign currencies.

OMS segment. The segment revenue contracted by -7.0%yoy to RM85.6m during the quarter. This was mainly due to lower vessel utilization rate during the quarter at 55%. Subsequently, the segment made a loss of -RM31.2m following the adverse operating environment for the segment due to the low oil price as well as the pandemic situation which resulted in disruption in demand for vessel charters and rates. Additionally, there were no vessels sold during the quarter. Hence, its total vessels remain at 32.

Orderbook amounts to RM17.2b as of June 2020. BAB’s firm contract orderbook as at end-June 2020 amounts to RM17.2b. Out of the RM17.2b, RM16.3b 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 RM10.1b over the entire optional extension period. For the optional extension; RM8.8b or 87% is attributable to the FPO segment while the balance of 13% is expected to come from the OMS segment.

Going forward. Management disclosed that it is confident that the company’s performance will continue to be underpinned by the FPO segment and acknowledges the declining contribution from its OMS segment. In-line with the bleak outlook for the OMS segment, BAB is expecting to slowly reduce its exposure in the OMS business segment as the sub-segment continues to be plagued by oversupply and competitive charter rates as a result of the oversupply which will continue to compress its margins. 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.

The proceeds from the potential sale of its OSV vessels will be primarily used to pare down its debt. We understand that the next tranche of repayment is due this coming May 2021 amounting to RM679.6m. Management shared that while it initially plans to use the proceeds from the sale of vessels to pare down its debt but due to the Covid19 this might not be possible. Hence, it is currently in discussions with its lenders to find viable solutions to the repayment. That said, we are confident that BAB will be able to meet its liabilities given that most debts that are undertaken are collaterised against specific projects.

Earnings impact. We are revising our FY20-21F earnings by +19.6% and +19.2% respectively given that we are expecting the continued performance of Kraken to sustain, underpinned by improving uptime and vessel availability. Furthermore, while we foresee the OMS segment to continue to face headwinds following the novel coronavirus (Covid19) global pandemic outbreak that has affected all industries and countries worldwide; we opine that the better performance from Kraken will more than offset the shortfall from the OMS segment going forward.

Maintain BUY with a revised TP of RM0.65. Hence, we are maintaining our BUY recommendation on BAB with a revised target price of RM0.65 after we roll forward our valuation base year to FY21. Our TP is premised on an unchanged PER20 of 10.0x pegged to an EPS21 of 6.5sen. Our BUY recommendation is premised on our anticipation that BAB’s FPO segment will continue to be robust in the coming quarters despite the current operating environment underpinned by its long-term charter contracts.

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. Additionally, while its OMS segment’s outlook remains persistently soft in the near future, we opine that this will improve should BAB secure the new contracts it has been eyeing in the Caspian Sea. That said, the timeline for the contract award remains unknown at this juncture.

Source: MIDF Research - 1 Sept 2020