• 9M24 results was above ours and consensus estimates

• The earnings beat was due to stronger contributions from FPSO Kraken and Olombendo

• Maintain BUY rating with a lower DCF-derived target price of RM0.82. The proposed merger with MISC’s offshore segment is a potential re-rating catalyst

9M24 core net profit of RM762m was above expectations

Bumi Armada (BAB) reported a higher 9M24 revenue of RM1.7bn (+17% YoY), driven by higher contributions from FPSO Kraken and Olombendo, following an upward revision of O&M rates implemented in 1Q24. All FPSOs continue to operate at a high 97–99% uptime. EBITDA margin expanded 11ppt YoY on better operating leverage. 9M24 core net profit of RM762m (+76% YoY) accounted for 85% and 82% of our and consensus forecasts, with results beat on stronger-than-expected margins.

Kraken impairment in 4Q24 well guided, Sterling V profit expected in 2H25

BAB recorded a RM437m impairment for FPSO Kraken in 4Q23, as its “value-in-use” fell below its net book value due to the nearing end of its firm charter period. Management shared that a smaller impairment relating to FPSO Kraken is expected in 4Q24. However, this is a non-cash impairment with no impact on actual cash flow. To prevent a recurrence of the FPSO Kraken impairment issue, BAB has decided to accelerate the depreciation for FPSO Sterling V over the 9-year firm charter period, instead of 16-years, which includes the 7-year option period. As a result, profitability is only expected in 2H25 but should not impact cash flow. This approach is expected to eliminate the risk of impairment for Sterling V as it approaches the optional charter period. Elsewhere, the firm charter period for Sterling II is set to expire in Mar25. BAB is currently in discussions with the charterer, ONGC, on another extension, with six annual extension options still available.

Maintain BUY with a lower RM0.82 target price

We raise our 2024E EPS forecast by 11% to reflect a better-than-expected margin but lower our 2025E estimates by 10% due to a reduced contribution from FPSO Sterling V, accounting for higher depreciation charges. We reiterate our BUY rating with a lower DCF-derived target price of RM0.82 (from RM0.83), which implies an 8x forward 2025E PE. Key risks to our BUY call include unforeseen operational delays in existing FPSOs, higher operating costs, and a sharp decline in the global oil price.

Source: Phillip Capital Research - 25 Nov 2024