This article first appeared in The Edge Financial Daily on June 23, 2017

Bumi Armada Bhd
(June 22, 70 sen)
Maintain hold with an unchanged fair value (FV) of 79 sen: We maintain our “hold” recommendation on Bumi Armada Bhd with unchanged forecasts and a FV of 79 sen per share based on a 20% discount to our sum-of-parts valuation of 99 sen per share.

Bumi Armada has suspended the operations of its wholly-owned floating production storage and offloading (FPSO) vessel Armada Perdana following irregular payments for the operation and maintenance (O&M) services, together with long-delayed charter payments involving the OML 120 block, Oyo field, off Nigeria, by independent oil and gas operator Erin Energy Corp.

Recall that two of Bumi Armada’s FPSOs, including Armada Perkasa, were operating in Nigeria, but were only being remunerated for their O&M services since the second quarter of 2016, but without being compensated for the bare boat charter, which made up the main bulk of their revenues. These were the first two FPSO charters secured by the group, in which the cost of the vessels amounted to US$200 million (RM858 million) each.

In the last quarterly briefing, management indicated that Armada Perkasa’s sale to Eni would be completed by the end of this month, but the selling price was not revealed.

We understand that no provisions would be needed for this vessel as the necessary impairment had already been accounted for in financial year 2016 (FY16).

As the outstanding Armada Perdana and Perkasa claims by Bumi Armada had been fully provided for in FY16, we estimate a 4% to 5% reduction in FY17 to FY19 earnings stemming from the loss of O&M revenue recognition from the two Nigerian vessels.

With the suspension of Armada Perdana’s operation, Bumi Armada’s activities in Nigeria have reached an end, with the only remaining FPSO Armada Olombendo having achieved first oil in Angola on Feb 8 this year.

Even with the full recognition of the massive US$1.5 billion Armada Olombendo, we remain cautious about the company’s near-term earnings trajectory given the uncertain penalties which could arise from delays in the commencement of the US$1 billion FPSO Kraken’s contract in the North Sea.

Recall that some of Kraken’s undisclosed late delivery provisions were only up to the backstop date of April 1, 2017, which was later extended to July 1 this year.

The backstop date gives the client the right to terminate the charter. With penalties potentially accruing at US$6 million per month, negotiations with client Enquest are still deadlocked.

Any improvement in offshore support vessel utilisation, currently with charter rates just above earnings before interest, taxes, depreciation and amortisation break-even levels, will be gradual against the backdrop of prevailing oil prices.

Given the past earnings disappointment, the group needs to convincingly navigate past its second quarter of FY17 results to reach its rerating inflection point.

The stock currently trades at a fair FY17 price-earnings ratio of 15 times versus the sector’s 20 times due to lingering risks over second half of FY17 earnings recovery. — AmInvestment Bank, June 22