Keep BUY, with new SOP-based MYR0.73 from MYR0.80 TP, 15% upside. While there may be a negative share price reaction towards Armada Kraken’s shut-in event, we are still on the assumption that such an issue will be resolved in the short term, and, as such, we do not expect a lumpy vessel impairment. We continue to like Bumi Armada for its attractive valuation (4.7x FY24F P/E) and strengthening balance sheet, led by stable FPSO operations and consistent debt repayment.
Armada Kraken shut-in. Last Friday, BAB announced that production from the Armada Kraken FPSO was recently shut-in following the failure of the critical hydraulic submersible pump (HSP) transformers. The attempted remediation programme was unsuccessful and the company is working with Enquest to resume production on a phased basis in the coming weeks. BAB has also brought forward its key maintenance activities, originally scheduled for execution in 3Q23 during the period of shut-in.
Earnings impact uncertain. Armada Kraken has been delivering a steady performance in the past few years after it faced technical challenges in 2018. According to Enquest, the vessel delivered top quartile performance, with production efficiency and water injection efficiency both at c.94% as at end-April. It is currently unclear what the earnings impact will be from the disruption as it largely depends on how soon the vessel can resume production. We estimate Armada Kraken to contribute about 30-35% of FY23F earnings. As such, we cut our FY23F earnings by 14% assuming a 3-month disruption coupled with additional maintenance costs arising from this event.
Keep BUY. While there may be a negative share price reaction on the stock, we are still on the assumption that such issue will be resolved in the short term, and, as such, we do not expect a lumpy vessel impairment. Recall that BAB has provided MYR1.6bn impairment charge on Armada Kraken in 2018 when the vessel had a technical failure which affected its uptime availability. We cut our SOP-based TP to MYR0.73 from MYR0.80 post earnings adjustments and impute a 10% discount to our Kraken valuation coupled with the incorporation of a 6% ESG discount, based on our ESG score of 2.7. Note that Armada Kraken accounted for >30% of our valuation and any long term disruption would present a downside risk to our TP. Our TP also implies FY24F P/E and P/BV of 5.4x (below its 5-year mean of 6x) and 0.6x (below +1SD from its 5-year mean).
Downside risks: Contract cancellations, failure to win new contracts, and a further deterioration in Armada Kraken’s operations.
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