• Keep BUY, with new SOP-based MYR0.59 TP from MYR0.58, 44% upside. Bumi Armada’s 1H22 results exceeded our expectations, with core profit surging 7% YoY on better Kraken availability, lower depreciation and finance costs. Apart from bidding for new FPSO projects, it is also exploring new opportunities such as floating LNG (FLNG) and carbon capture projects in the longer run. BAB remains our sector Top Pick for its undemanding valuation (3.4x FY23F P/E) and strengthening balance sheet, led by stable FPSO operations and continuous asset monetisation.

• Results are above expectations. At 65% and 61% of our and Street full- year estimates, 1H22 earnings of MYR403m (+7% YoY) came in above expectations, due to lower-than-expected depreciation and tax expenses. No dividends were declared for the quarter, as expected.

• 2Q22 core profit improved by 26% QoQ due to higher subsea construction work orders in the Caspian Sea and preliminary front end engineering and design (Pre-FEED) revenue as well as better JV & associate (+58%), led by a reversal of tax liabilities from JVs. Cumulatively, 1H22 core earnings improved by 7% on better Kraken availability, lower depreciation charges (-33%), and finance costs (-16%) as a result of debt repayment.

• Outlook. There are currently only three OSVs remaining, and one has been classified as an asset held for sale. The USD50m subsea construction works are expected to be completed by 2H22, and Armada Claire will be sold or scrapped. Meanwhile, BAB repaid USD91m in borrowings in 2Q22 to reduce interest costs, while its net gearing also dipped to 1.19x in 2Q22 (1.33x in 1Q22). India’s Oil and Natural Gas (ONGC) KG-DWN 98/2 FPSO construction is >90% completed as of Jun 2022, with sail away planned in 4Q22. BAB has submitted tenders for new FPSO projects predominantly in Angola. Management is comfortable to take on up to two new projects and the funding structure may possibly also involve upfront payment from clients.

• Keep BUY. We increase FY22F-24F earnings by 5-14% after lowering tax expenses and depreciation charges. Our TP rises slightly to MYR0.59 from MYR0.58 after an earnings adjustment. Our TP also incorporates a 2% ESG discount, based on our ESG score of 2.9, as per our proprietary methodology. Our TP implies FY23F P/E and P/BV of 5.0x (below its 5-year mean of 7x) and 0.84x (slightly above +1.5SD from its 5-year mean). Downside risks: Contract cancellations, failure to win new contract, and a deterioration in Armada Kraken’s operations.

Source: RHB Research - 29 Aug 2022