ARMADA (5210) - Bumi Armada: Sharp Turnaround With 6M17 Net Profit of RM165M

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Offshore energy facilities and services provider Bumi Armada Bhd (BAB) returned to the black with a net profit of RM165M for the first half of 2017 (6M17), a turnaround from the RM495M net loss reported in 6M16. According to a report issued by Macquarie Equities Research (MQ Research) early this morning, although BAB’s clean net profit is ahead of consensus and their forecasts, they regard the beat as low quality, with key variances to their forecasts coming from one-off revenue from the LukOil project and high accounting profit from the Armada Olombendo FPSO.
Event

    BAB reported 6M17 headline net profit of RM165m, a sharp turnaround from the RM495m net loss reported in 6M16. Adjusting for impairments and write back in doubtful debts, 6M17 clean net profit increased by 65% yoy to RM156m, ahead of consensus and MQ Research’s forecasts.

    However, the beat is of a low quality, in MQ Research’s view. Key variances to MQ Research’s forecasts are one-off revenue from the LukOil project (estimated at over RM100m) and high accounting profit from the Armada Olombendo FPSO.

    6M17 free cash flow was weaker than expected at negative RM1.1bn due to challenges and delays in commissioning of FPSO charters (Kraken, Madura).

Impact

    BAB's FPO (Floating Production and Operation) business reported higher 6M17 EBIT of RM215m (vs RM27m in 6M16) on maiden profit contributions from Armada Olombendo and Armada LNG Mediterrana. Meanwhile, the OMS (Offshore Marine Services) business reported a strong earnings turnaround (RM120m EBIT in 6M17, from RM32m loss in 6M16), attributable to one-off earnings from the LukOil project, lower operating cost and lower depreciation charges following the recognition of RM1.1bn asset impairments in 4Q16.

    Sequentially, 2Q17 clean net profit was higher at RM116m (vs RM40m in 1Q17) due to the one-off profit from LukOil project (estimated at RM100m), which more than offset higher interest expenses of RM108m (vs RM64m in 1Q17).

    While the net gearing ratio has inched up to 1.88x (from 1.79x at end-Dec16), MQ Research believes that BAB has sufficient buffer (RM1.8bn gross cash) to fund the remaining capex for its projects at hand.

    Operationally, the results are a mixed bag. The positives: (i) Armada Olombendo is enjoying high uptime and steadily producing over 65k boe/d. MQ Research expects the FPSO to be signed off in 3Q17; (ii) CNOOC announced on 1st August that gas from Madura BD field has started. MQ Research expects the chartering of Karapan Armada Sterling III FPSO to commence in 3Q17; and (iii) OSV utilisation has improved to 52% in 2Q17, from 42% in 1Q17.

    The challenges: (i) the commissioning of Armada Kraken FPSO is ongoing; BAB and the client, EnQuest Plc, had entered into an interim agreement for the Armada Kraken FPSO charter. During the interim period, the bareboat charter fees will be based on the amount of heavy oil processed (by FPSO) vs the well production. MQ Research expects BAB to incur losses during this interim period due to the high finance cost for Armada Kraken FPSO. Meanwhile, EnQuest expects the Kraken field to be fully ramped up by end-2017; (ii) discussions with Erin Energy for the Armada Perdana FPSO charter payment are protracted; and (iii) while BAB is tendering for several FPSO projects, management do not expect any awards in 2H17.

Action and Recommendation

    Under review.

Source: Macquarie Research - 28 Aug 2017


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