Bumi Armada - Surprise Impairment on Kraken; Keep BUY

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+0.09 (15.25%)
  • Keep BUY, new MYR0.68 TP from MYR0.73, 31% upside. Bumi Armada’s FY23 results beat estimates on stronger-than-expected contributions from Armada Kraken. Following the surprise impairment made on this vessel, we cut FY25F earnings to reflect a steeper rate cute upon the extension of its charter from 2Q25 onwards. We still like BAB for its undemanding valuation (3.6x FY24 P/E and 5.2x FY25 P/E) and strengthening balance sheet, led by stable FPSO operations.
  • Above expectations. At 122% and 121% of our and Street’s full-year estimates, FY23 core earnings of MYR739m (-11% YoY) came in above expectations due to one-off earnings from Armada Kraken following the resolution of an outstanding issue and lower-than-expected opex. No dividends were declared for the quarter, as expected.
  • BAB recorded a core profit of MYR291m (+52% QoQ; 34% YoY) after stripping off a MYR514m impairment on Armada Kraken, MYR35m impairment reversal from a JV, MYR20m reversal of accrued costs following OSV division closure, MYR2m unrealised FX gain, etc. The stronger QoQ performance was led by better operational numbers from Armada Kraken as it had been restored to pre-shutdown levels in early August, coupled with an additional one-off net profit contribution from this project following the resolution of an outstanding issue with the charterer. FY23 core earnings declined as a result of an exceptionally weak 2Q23 performance – no thanks to the shutdown of Kraken.
  • Outlook. The sizeable impairment on Armada Kraken caught us by surprise, and management explained that it was mainly due to the value-in-use (VIU) of this vessel falling significantly below its net book value (NBV) approaching the end of firm period (Mar 205), coupled with a hike in the discount rate in arriving at the VIU. It was highlighted that there has been no change to contracted cash flows and the recent transformer failure did not affect the VIU. BAB is currently in talks with the client on the potential extension and the renewal rate could be 50-70% lower than its firm contract. The group repaid USD57m in borrowings in 4Q23, lowering its net gearing to 0.65x (0.66x in 3Q23). The Armada Sterling V FPSO, which is under India’s Oil and Natural Gas’ or ONGC KG-DWN 98/2 project, achieved first oil in January and is targeting to achieve final acceptance in the near term.
  • Keep BUY. We lift our FY24 earnings by 3% post housekeeping adjustments but cut FY25F earnings by 25%, assuming a 60% (from 30%) cut in the daily charter rate for the Armada Kraken extension. As such, our DCF-based TP drops to MYR0.68 from MYR0.73 with a 6% ESG discount imputed, based on our ESG score of 2.7. Downside risks: Contract cancellations, failure to win new contracts, and a deterioration in the Kraken operation.

Source: RHB Research - 29 Feb 2024

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