KEY INVESTMENT HIGHLIGHTS

• Bumi Armada’s 3QFY20 normalised earnings grew by +42.2%yoy to RM101.8m
• Lower revenue from Armada Kraken FPSO cushioned by improved OMS performance
• One OSV vessel disposed during the quarter
• Current orderbook at RM17.2b, with optional extensions worth up to RM10.0b
• FY20-21F earnings estimates maintained
• Maintain BUY with unchanged TP of RM0.69 per share

BAB’s 3QFY20 earnings grew +42.4%yoy to RM101.8m. Bumi Armada Berhad’s (BAB) 3QFY20 normalised earnings - excluding impairment on its OMS segment of RM16.2m, came in at RM101.8m. This brought its cumulative 9MFY20 earnings to RM311.9m which was above our and consensus’ full-year earnings estimates at 82.2% and 85.3% respectively. Comparing against 3QFY20, revenue was higher by +6.9%yoy whilst earnings grew by +42.2%yoy respectively. Meanwhile on a quarterly sequential basis; revenue and earnings declined by - 7.0%qoq and -15.0%qoq respectively due to the planned shutdown of Armada Kraken during the quarter. This was however offset by: higher revenue recognition from its OMS segment arising from higher OSV utilization recorded for the quarter at 56% vs 55% in 2QFY20.

FPO (previously FPSO & FGS) segment. The segment’s revenue increased by +3.7%yoy mainly attributable to higher contribution from Armada Kraken FPSO arising from improved vessel availability. Correspondingly, segment operating profit grew by +26.1%yoy to RM285.1m due to the better revenue recognition. Meanwhile, on a quarterly sequential basis; the segment’s revenue and profit declined by -9.7%qoq due to the planned shutdown of Armada Kraken during the quarter. However, the segment recorded an increase of +14.0%qoq in operating profit mainly due to gains arising from translation of intercompany balances denominated in foreign currencies.

OMS segment. The segment reported an increase in revenue by +27.0%yoy to RM93.9m during the quarter. This was mainly due to higher vessel utilization rate during the quarter at 56%. Subsequently, the segment made a profit of RM4.8m following the improved utilization rate. There was also a disposal of one (1) small vessel recorded during the quarter that was sold at above its net book value at about RM10.7m. Hence, its total vessel has now reduced to 31. Additionally, the segment also recorded an impairment of RM16.2m during the quarter on three (3) of its vessels that have recently re-classified as “held-for-sale” which are currently pending completion of sales. The impairment represents the expected net sale amount for the three (3) vessels inclusive of the cost of getting the vessels out of storage and to the buyers.

Orderbook amounts to RM17.2b as of end-September 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 RM10.0b over the entire optional extension period. For the optional extension; RM8.7b or 87% is attributable to the FPO segment while the balance of 13% is expected to come from the OMS segment.

RM235.2m of debt repaid in 3QFY20. In 3QFY20, BAB paid RM235.2m in terms of debt repayment. The repayment was for both its corporate debt as well as project financing. We continue to monitor its debt repayment closely as 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 progress slower than initially anticipated. 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 collateralized against specific projects and its financial performance and working capital has continued to improve with the increasing availability and uptime of Armada Kraken.

OMS segment outlook to remain cloudy but contribution expected to be stable. 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. We also understand that the negotiation with regards to its two vessels vying for contracts in the Caspian Sea has been stalled at this juncture due to the adverse operating environment of late. However, the segment’s contribution is expected to remain stable into FY21F premised on improving global demand for crude oil.

b Despite recording earnings above our expectations, we are making no changes to our FY20-21F earnings estimates at this juncture. This is as we understand that there will be a planned shut down for one of its JV vessels expected in 4QFY20 as well as; a potential adjustment in revenue on Kraken’s performance which could lower the contribution coming from Armada Kraken in 4QFY20. Due to the abovementioned reasons, we opine that BAB will be able to meet our full-year FY20F earnings estimate.

Maintain BUY with an unchanged TP of RM0.69. All in, we are maintaining our BUY recommendation on BAB with an unchanged target price of RM0.69. 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 - 20 Nov 2020