• Keep BUY and SOP-based MYR0.73 TP, 45% upside. Bumi Armada’s 1H23 results missed expectations dragged by Kraken’s disruption. Following Kraken’s operations being restored to pre-shutdown levels in early August, the company is likely to deliver better sequentially quarterly earnings in 2H23. We are surprised by the possible venture into the exploration and production segment following its consortium securing an exploration acreage from the Indonesian Government.

• Missed expectations. At 37% of our and Street full-year estimates, BAB’s 1H23 earnings of MYR257m (-36% YoY) missed expectations due to additional cost provision in related to Kraken’s disruption. No dividends were declared for the quarter, as expected.

• 2Q23 core profit plunged by 74% QoQ to MYR53m due to a failure of Kraken’s hydraulic submersible pump (HSP) transformers and lower engineering services charged to its jointly-owned FPSO as well as lower JV & associate contributions. Cumulatively, 1H23 core earnings contracted by 36% to MYR257m as a result of an exceptionally weak 2Q23 performance.

• Outlook. Kraken’s operational performance has been restored to preshutdown levels in early August, with the first new transformer to be installed early September and a second in late September. Currently, BAB is undergoing root-cause assessment (RCA) but we are guided by the bulk of the cost provision recognised in 2Q23. As such, we think the company will deliver better sequentially quarterly earnings in 2H23. BAB has also disposed its remaining OSV and Armada Claire in 2Q23. Meanwhile, it also repaid USD92m in borrowings in 2Q23, lowering its net gearing to 0.72x in 2Q23 (0.82x in 1Q23). Armada Sterling V FPSO, which is under India’s Oil and Natural Gas (ONGC) KG-DWN 98/2 project is now ready to commence commissioning and the subsea equipment is now being installed. BAB is expecting first oil in Oct 2023. Last month, Upstream reported that a consortium comprising Netherlands-registered Pexco Energy and BAB has been awarded the Akia block, which is located off the coast of North Kalimantan, Indonesia. It has an estimated resource of 2bn barrels of oil and 9tri cbf of gas. We are surprised by the possible venture into exploration and production segment for BAB. While management has yet to disclose more details of this deal, we are guided that there are also potential topside modular development work opportunities in the longer run.

• Keep BUY. We cut FY23F earnings by 14% to account for Kraken’s cost provision, while our TP remains unchanged at MYR0.73 with a 6% ESG discount, based on our ESG score of 2.7. 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 deterioration in Armada Kraken’s operations.

Source: RHB Securities Research - 28 Aug 2023