KUALA LUMPUR (June 6): Analysts have downgraded Bumi Armada Bhd on the unexpected Kraken floating production storage and offloading (FPSO) system shutdown, which contributes a substantial portion of the group’s revenue.
CGS CIMB said in a note on Tuesday (June 6), citing Bumi Armada, that the unplanned Kraken FPSO shutdown will cause a “material financial impact”. However, the impact cannot yet be reliably estimated.
“Until this incident is resolved, Bumi Armada’s share price is unlikely to perform. Hence, we downgrade from ‘add’ to ‘hold’ and lower our SOP (sum-of-parts)-based TP (target price) to 69 sen,” the research firm said.
CGS CIMB noted that FPSOs are typically required to achieve a minimum annual operational uptime of circa 95%, failing which the FPSO charterer does not pay the full bareboat charter contract (BBC).
“While FPSO Kraken received final acceptance from EnQuest in June 2017, Bumi Armada was paid just 70%-80% of the full BBC rate for failing to meet its uptime threshold until 1Q(20)20, when that threshold was achieved. For the past three years, the FPSO Kraken had been performing well, until the recent incident with the HSP (hydraulic submersible pump) transformer.”
Without guidance from either Bumi Armada or EnQuest, CGS CIMB has included a loss of six months of BBC cash receipts in 2H2023F, a loss of six months of finance lease income in the FY2023 profit and loss statement (P&L), and US$50 million of repair and maintenance costs borne solely by Bumi Armada and charged into its FY2023F P&L.
As such, the research firm lowered its FY2023 core net profit by 47%, implying the reduction in SOP valuation of Bumi Armada from 87 sen to 79 sen from the three adjustments above, and a lower TP of 69 sen.
Meanwhile, Hong Leong Investment Bank (HLIB) Research estimates that the Kraken FPSO has a daily charter rate of approximately USD480k/day (or USD175m/year), which accounts for some 35% of the group’s revenue contribution in FY2022.
“We are negative on this development. While we acknowledge that we do not have clarity of Kraken’s shut-in timeline yet, we decide to make an arbitrary estimate of a six-month downtime for the said FPSO,” it added.
That said, the research house trimmed its FY2023 net profit forecast by 38%, while leaving FY2024-FY2025 earnings estimates unchanged.
HLIB downgraded Bumi Armada to a “sell” with a lower TP of 54 sen (from RM0.87 previously) — pegged to a price-to-earnings (PE) multiple of six times on FY2023 forecasted earnings.
Last Friday (June 2), Bumi Armada announced that the group’s heavyweight Armada Kraken FPSO was recently shut-in, following the failure of critical HSP transformers.
The Kraken FPSO is deployed at the Kraken Field in the UK North Sea, with EnQuest as the field operator.
HLIB expects Bumi Armada’s plans to carry out key maintenance activities, which were originally scheduled for execution within two periods of single train operations in 3Q2023, to be done during the period of shutdown.
“This is intended to negate the requirement for any further planned outages for the remainder of the year. More on Kraken. We note that the Kraken FPSO’s firm contract period will end in 2H2025 — with options for 17 annual extensions,” it added.
Apex Research said while it liked the stock for its earnings momentum and continuous effort to lower gearing, it views the stock as fully valued at the moment.
As such, it said, subject to rerating if it secures new FPSO contracts, the research unit reduced valuation to +1 standard deviation from +1.5 standard deviation on its three-year average price to book valuation (PBV) and FY2023 PBV. It downgraded the stock to “sell” with a lower TP of 48 sen (previously 61 sen).
Apex Research noted that Bumi Armada’s orderbook stood at RM11.1 billion, following a slight decline from RM11.7 billion in 4Q2022, with potential extension worth RM9.3 billion.
It said the FPSO orderbook can sustain the group’s earnings for the long term, with three FPSO contracts expiring in 2024-2025, while another four contracts are in longer tenure.
Source: TheEdge - 7 Jun 2023