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This article first appeared in The Edge Financial Daily on June 9, 2017

Bumi Armada Bhd
(June 8, 76 sen)
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Despite the “safety” of long-term contracts, Bumi Armada Bhd suffered the non-payment of bareboat charters on the Armada Perkasa and Armada Perdana floating production, storage and offloading (FPSO) vessels from financial year 2015 (FY15), and the premature termination of the Armada Claire FPSO contract in FY16, as a consequence of the fall in oil prices, on top of specific reserve-related issues. Bumi Armada also failed to deliver the Armada Kraken FPSO on time, and failed to achieve first oil by the backstop date, resulting in more than US$100 million in compensation payment to its charterer in FY16.

The offshore marine service (OMS) business was also impacted by falling charter rates and falling utilisation rates since mid-FY14, ultimately delivering core earnings before interest and tax losses from FY15 onwards. Both the offshore support vessel and transport and installation vessel were impacted, with both types of vessel at only 50% utilisation during FY16. Over the past three years, Bumi Armada made RM2.2 billion in asset impairments and provided RM325 million for doubtful debts across the FPSO and OMS segments, totalling 18% of Bumi Armada’s mid-2014 market capitalisation. However, Bumi Armada is now turning the corner.

For the first quarter of FY17, Bumi Armada delivered its best results in a year, with a core net proft of RM81 million. In future quarters, we expect a stream of progressively better results, and positive news flow in relation to its new projects — the Armada Olombendo, Kraken and Karapan Armada Sterling 3 — as they achieve final acceptance and begin their firm charter periods from the second half of 2017 (2H17). Bumi Armada is “very confident” that the Kraken will achieve first oil before June 30, and thus avoid further compensation provisions, with provision write-backs even possible.

The Armada Claire is being offered for deployment to several operators of marginal fields, while Bumi Armada is preparing to bid for Oil and Natural Gas Corp Ltd’s (ONGC) KG-DWN-98/2 FPSO project. Meanwhile, on the OMS side, the Armada KP1 pipelay barge is being prepared for work in Indonesia in 2H17. We have not factored any potential contract win in our TP.

If Bumi Armada wins the ONGC project, we believe that it will have to issue around RM1 billion of new equity, most likely in the form of rights shares, to part-fund the capital expenditure. Another risk relates to whether the charter of the Armada Perdana FPSO may be prematurely terminated if Erin Energy Corp cannot survive its cash-flow crisis. — CIMB Research, June 7

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