This article first appeared in The Edge Financial Daily, on June 1, 2016.
Bumi Armada Bhd
(May 31, 65 sen)
Upgrade from sell to hold with a fair value of 69 sen: We have upgraded our recommendation on Bumi Armada to “hold” from “sell” as its share price has fallen to our unchanged fair value of 69 sen a share. While we have lowered our sum-of-parts (SOP) valuation by 10% to RM1.38 a share, our discount to SOP has also been reduced to 50% from 55% as the group’s major projects are nearing completion.
We have cut financial year 2016 (FY16) to FY18 forecast earnings by 8% to 49% due to reduced revenue recognition from the four major conversion projects in Keppel yard, Singapore — floating, production, storage and offloading vessels (FPSOs) Armada Kraken, Armada Olombendo, Karapan Armada Sterling III and floating storage unit Armada LNG Mediterranna.
Additionally, our charter rate assumptions have also been lowered by 20% for offshore support vessels (OSVs), while utilisation rates have been halved for the transport and installation segment, as Armada Hawk and Armada Condor have been cold stacked since the fourth quarter of calendar year 2015 (4QCY15) and 1QCY16 respectively.
Excluding one-off impairments of RM18 million for the impairment of Armada Condor, the group’s FY15 core net profit of RM41 million was way below expectations, accounting for 12% of our earlier FY16 estimated earnings and 14% of the consensus’ RM299 million.
Bumi Armada’s 1QFY16 core net profit fell 71% quarter-on-quarter and 48% year-on-year due to a 50% drop in Armada Claire contributions, reduced contributions from EnQuest’s Kraken FPSO, Eni’s Armada Olembendo 1506 FPSO, Malta-based Armada liquefied natural gas Mediterrana floating storage unit conversion projects and the Madura FPSO as these projects are nearing completion with deliveries expected in 3QFY16 to 4QFY16.
This was exacerbated by non-contribution from DP2 multipurpose vessels Armada Hawk and Armada Condor, which was impacted by the absence of offshore construction work, and the continuation of a low OSV utilisation rate of 46%, unchanged from 4QFY15.
For the rest of FY16, we do not expect any significant recovery in earnings as the major conversion projects are already at the tail end, while any improvements in OSV utilisation will be gradual against the backdrop of a prevailing low-charter rate environment. Turnaround for the group’s earnings is forecast to start in FY17, when the group’s four major projects start commercial operations.
In the absence of new contracts together with the termination of the Armada Claire FPSO charter, the group’s firm order book has decreased by 12% to RM24 billion from RM27.5 billion in 4QFY15 on absence of new contracts. Optional extension values, meanwhile, have fallen 20% to RM12.2 billion from RM15.3 billion.
The group currently trades at a low FY17 forecast price-earnings ratio of nine times versus the sector’s 16 times due to concerns over counterparty risks to the huge Kraken project amid a high net gearing level of one times. — AmInvestment Research, May 31
ARMADA (5210) - Turnaround for Bumi Armada to begin in FY17