This article first appeared in Capital, The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

Target price: 84 sen BUY

HONG LEONG INVESTMENT BANK RESEARCH (MARCH 21): Bumi Armada’s FY21 core net profit soared to a record high of RM659.1 million, growing 42% year on year (y-o-y) on the back of: (i) a 38% increase in profit contribution from its floating production storage and offloading (FPSO) segment, mainly due to the improvement in Kraken’s performance throughout the year; (ii) increased joint-venture contribution; and (iii) a decline in interest expense of RM93.8 million (or 19%), reflecting a significant improvement in its debt profile and balance sheet. We are forecasting yet another record high year for Bumi Armada in FY22.

Amid the volatility over the past few weeks due to the ongoing developments with regard to the Russia-Ukraine crisis, Bumi Armada’s share price fell about 30% from a high of 57.5 sen on Feb 7 and it last traded at 40.5 sen. From our findings, we gather that the group’s subsea construction vessels — Armada Installer and Armada Constructor — are currently contracted with Lukoil in the Caspian Sea up to end-2022 under a contract value of circa US$50 million. Based on our check with the group’s management, there has been no ground indication of default/non-payment risk from Lukoil.

We see vast improvement in Bumi Armada’s balance sheet, cash flow and operational efficiency with the following highlights: (i) FY21 net cash flow from operations has improved by 50% y-o-y; (ii) lower net debt of RM6.1 billion as at end-4Q21 (from RM7.4 billion as at end-4Q20); and (iii) net gearing declined for the seventh consecutive quarter to 1.5 times as at end-4Q21 from a peak of 2.9 times in 1Q20. The remaining balance of tranche 1 under a US$660 million term loan was US$27 million, with a maturity in November 2022. We do not foresee any major hurdles in meeting its repayment obligations for tranche 1. We believe that Bumi Armada’s debt management risk is gradually reducing over the coming quarters. The group is looking to dispose of four more of its remaining vessels in the future as it aims to exit the offshore support vessel business entirely.

Target price: 60 sen BUY

RHB RESEARCH (MARCH 22): AQRS was awarded a subcontract by Syarikat Muhibah Perniagaan Dan Pembinaan (SMPP) on March 21 worth RM31.9 million. The subcontract is for the execution and completion of sewer pipe relining works together with open excavation and pipe jacking works for Klang and Kuala Langat. Besides reducing its dependency on infrastructure jobs, the company is also in the process of finalising several property development joint ventures that may be announced in 1H22, which could boost its gross development value pipeline by RM400 million. This latest contract win brings AQRS’ latest outstanding order book to RM1.2 billion, translating into an order book/revenue cover ratio of 4.7 times. In terms of profitability, management guided that net profit margin could be in the mid-double-digit range.

We make no changes to our FY22F to FY24F earnings forecast as the latest contract win is within our FY22F job replenishment assumption of RM500 million. We are maintaining our target PE for its construction segment in our SOP valuation from eight times, which is at a circa 30% discount to the KL Construction Index’s forward PE, to reflect the tough competition in the construction space. Our unchanged target PE is justified, given AQRS’ smaller market capitalisation of RM201 million.

Target price: 69 sen OUTPERFORM

PUBLICINVEST RESEARCH (MARCH 22): LBS Bina announced that it has entered into a heads of agreement (HoA) with Ancom Bhd, Nylex (M) Bhd, Sinar Bina Infra Sdn Bhd and BTS Group Holdings PCL for a collaboration to build and operate a light rail transport (LRT) system connected with the railway shuttle link currently being built from Singapore to Johor Baru, with an integrated property development using the “transit-oriented development” concept in Johor Baru.

Among the proposals in the HoA are: (i) a proposed joint venture in connection with the LRT concession and the development of such lands in Johor as part of the LRT project; and (ii) proposed acquisition by Nylex of three plots of land located in Johor from LBS measuring a total of 5.5 acres at a consideration to be agreed upon by LBS and Nylex. Details are still light at this juncture, but we are positive about the land monetisation by LBS in Johor while the proposed JV could also leverage the expertise of BTS Group Holdings, which is said to be involved in the mass transit business in Thailand. No change to our earnings estimates for now as we maintain our “outperform” call with target price unchanged at 69 sen (50% discount to fully diluted RNAV).

Fair value: RM4.40 SELL

AMINVESTMENT BANK (MARCH 22): We maintain “sell” on Sime Darby Plantation (SDP) with a fair value of RM4.40 per share. We believe that there is more downside to crude palm oil (CPO) prices than upside as palm production is expected to pick up going forward. Our fair value is based on an unchanged FY23F PE of 18.0 times. We ascribe a three-star environmental, social and governance (ESG) rating to SDP.

Impactt Ltd is expected to complete the labour audit report on SDP’s palm operations in Malaysia by end-March. The report will be submitted to the US Customs and Border Protection in April. SDP will then release a summary of the report to the public when it is finalised.

Due to the various [labour management] improvement plans that have been implemented, SDP’s total operating costs are expected to increase by 7% to 8% in FY22F. Apart from workers’ housing, SDP has set up a new grievance channel in addition to the two existing channels.

SDP has also imposed a cap on workers’ overtime, now limited to four hours a day instead of 104 hours per month previously. Also, workers no longer work for more than 14 consecutive days.

We are keeping our FY22F net profit for SDP for now. We think that the strong CPO prices so far this year will help mitigate the 7% to 8% increase in operating expenses.

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