This article first appeared in The Edge Financial Daily on November 27, 2018
Bumi Armada Bhd
(Nov 26, 30 sen)
Maintain add with a lower target price of 70 sen: Bumi Armada Bhd’s core net profit for third quarter of financial year 2018 (3QFY18) ended Sept 30, 2018 of RM66 million was 8% higher year-on-year (y-o-y), mainly due to a tax credit in 3QFY18 versus tax expense in 3QFY17. The floating production storage and offloading (FPSO) arm saw its 3QFY18 earnings before interest and tax (Ebit) rise 8% y-o-y on the back of the final acceptance of the Olombendo on May 17, 2018, resulting in a higher daily charter rate (DCR), partially offset by the extension of the Armada Te Giac Trang (TGT1) into its option period at a lower DCR. Conversely, the offshore marine service segment suffered an Ebit loss in 3QFY18 versus an Ebit profit in 3QFY17 due to a 10-percentage-point fall in offshore support vessel (OSV) utilisation to only 43% and the completion of Armada Installer’s work for Lukoil in the Caspian Sea in June 2018. Bumi Armada’s 3QFY18 reported net loss was a substantial RM503 million due to RM578 million in exceptional items on impairments to OSV fleet.
There were some positive developments from its core FPSO business in 3QFY18. TGT1’s contract was extended by six years and three months commencing August 2018, which is a substantial portion of its full eight-year option period. The Kraken achieved final acceptance in September 2018, upon which Bumi Armada was paid its full DCR (minus the agreed penalty for non-compliance with processed crude oil specifications) and the accounting treatment transitioned from operating lease to finance lease.
Three months ago, we were told that Bumi Armada had US$500 million (RM2.1 billion) in corporate borrowings that needed to be repaid in three equal tranches in October 2018, December 2018, and May 2019. In October 2018, Bumi Armada paid US$120 million to all syndicated lenders, leaving US$380 million for which an extension for its repayment deadline was being negotiated to match the long-term nature of Bumi Armada’s assets and cash flow. An agreement is expected to be reached with lenders sometime in 1QFY19. We expect Bumi Armada’s debt issues to be resolved amicably, although at potentially higher interest rates, as it will not be in the lenders’ interest to push Bumi Armada to the wall.
A successful court hearing for the Armada Claire case in Western Australia’s Supreme Court could recoup US$283.50 million (20 sen per share) for Bumi Armada in FY19 and help it repay its corporate borrowings faster than expected. In 2QFY18, Bumi Armada provided for US$119 million (eight sen per share) in penalties payable to EnQuest over the next 23 years in relation to Kraken’s technical issues. However, if Bumi Armada successfully resolves the technical issues, the penalties need not be paid and can be added back to our sum-of-parts valuation. — CGSCIMB Research, Nov 26