This article first appeared in The Edge Financial Daily, on April 21, 2016.

Bumi Armada Bhd
(April 20, 77.5 sen)
Maintain buy call with an unchanged target price (TP) of RM1.05: The 29% fall in share price from the floating production storage and offloading (FPSO) Armada Claire dispute has more than priced in the worst-case 23 sen per share impact. 

Should Bumi Armada Bhd win the legal tussle against Woodside Energy Julimar Pty Ltd, there is a potential 18 sen upside not factored in our forecasts yet. 

That issue aside, the execution of four FPSO or floating storage unit (FSU) projects in hand is crucial to the group’s prospects beyond 2016. Otherwise, the offshore support vessel (OSV) and transport and installation (T&I) businesses will remain challenging up to 2017. 

Our RM1.05 sum-of-parts TP, which excludes any compensation impact from the FPSO Armada Claire debacle, offers an attractive 46% upside.

The FPSO is currently off-hire and demobilised at a Batam yard. Bumi Armada has fully settled the outstanding loans post the debacle. The court case could take two to 24 months to conclude. An out-of-court settlement would be the best possible outcome. 

The best-case scenario, in our view, would be a US$263 million (RM1.02 billion) [18 sen per share] compensation favouring Bumi Armada. A redeployment opportunity is remote for now. An impairment drive is inevitable, but a decision remains elusive.

The operational environment remains difficult for the OSV division, which is expected to remain financially in the red up to 2017. Bumi Armada’s key objective will be to optimise utilisation over daily charter rates. 

The current OSV utilisation is at 47%, while cash cost utilisation is at 35%. While the Petroliam Nasional Bhd and Lukoil-Nizhnevolzhskneft’s T&I works will anchor the latter’s earnings up to 2018, works are scarce. Three T&I vessels are currently stacked.

Earnings will be weaker in 2016 versus 2015, largely due to the nine-month earnings loss from Armada Claire. 

Bumi Armada’s gearing level will be at its peak in the fourth quarter of financial year 2016 before trending down from 2017 as four ongoing FPSO/FSU works (Angola, Kraken, Madura and Malta) commence operations. 

A positive outcome from the FPSO Armada Claire dispute is a key rerating catalyst, which has been totally ignored by the market, for now.— Maybank Investment Bank Research, April 20