Bumi Armada - Selldown Offers Opportunity to Accumulate

Price Target: 
Price Call: 
Last Price: 
+0.17 (29.31%)
  • FY23 core net profit of RM727m was 23% above our forecast, upon the resolution of outstanding issues with EnQuest, and better Kraken operations.
  • Reiterate Add with a higher SOP-based TP of 75 sen, as the knee-jerk 11% sell-off yesterday over 4Q23 asset impairments is unwarranted, in our view.
  • Other potential re-rating catalysts include the FPSO Armada Sterling 5 receiving final acceptance, and a contract extension for the TGT-1.

4Q23 core profit exceeded expectations…

4Q23 core net profit of RM313m was substantially above our RM177m estimate, because of stronger-than-expected operating performance by the FPSO Kraken after all the issues relating to its transformer failures in May 2023 were fully resolved in Aug 2023. Also, BAB settled in 4Q23 long-outstanding contractual issues with EnQuest (since 2016) over the technical performance of the FPSO Kraken, and this permitted BAB to record both higher revenues and reverse prior years’ cost provisions in 4Q23 amounting to a total of RM70m. The closure of the OSV division, after the last vessel was sold in 2Q23, also saved BAB RM20m in costs during 4Q23.

…but impairments caused the quarterly PATAMI to be in the red

On the other hand, BAB reported a net loss of RM166m in 4Q23, which we did not expect. This arose from RM437m impairment against the FPSO Kraken, as well as a RM77m impairment against the net book value (NBV) of the two subsea construction vessels due to delays in securing new jobs caused by sanctions against Russia. The impairments were partially offset by RM36.4m in writebacks of prior years’ provisions of doubtful debts . The FPSO Kraken impairment was due to the NBV of the asset written down to its value in use (VIU); the latter is calculated as the discounted present value of future cashflows. We explain in detail the reasons for such an impairment on page 3, but emphasise that the contracted cashflows for the FPSO Kraken remain unchanged and therefore, our DCF value of the FPSO Kraken charter contract is not affected by the accounting, non-cash impairment. Trading in BAB shares is likely to be dominated by retail flows, in our view, and the average retail investor may find it difficult to understand the rationale for such an impairment; this caused BAB’s shares to plunge 11% yesterday after the lunchtime release of its FY23 results. In our view, this is an opportunity for investors to accumulate BAB shares for a potential short-term rebound.

Sterling 5 final acceptance, TGT-1 extension are potential catalysts

We reiterate our Add rating; other potential re-rating catalysts include the FPSO Armada Sterling 5 securing final acceptance by the client in the next few months, and the FPSO Armada TGT-1 potentially securing a seven-year charter extension from Nov 2024F, which could add a further 15 sen to our SOP. Downside risks include a sudden decline in oil prices that may affect BAB’s growth opportunities, and a potential rights issue in the medium term to fund BAB’s longer-term growth plans.

Source: CGS-CIMB Research - 29 Feb 2024

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