Bumi Armada Bhd
(Nov 24, 55.5 sen)
Maintain hold call with a target price (TP) of 60 sen: Bumi Armada Bhd (BAB) reported its weakest ever quarterly results with core net losses at RM6 million, dragging down the nine-month period of financial year 2016 (9MFY16) core net profit to RM92.5 million. The 9MFY16 revenue and core net profit achieved 63% and 49% of our full-year estimates. Deviations against our forecasts were mainly due to lower conversion activities from Armada Olombendo and Kraken as well as reduced contributions from both Armada Perdana and Perkasa (APP). We cut our FY16-18E (estimated) earnings per share (EPS) by 12.1%-39.3%. We maintain “hold” with a lower TP of 60 sen following the lower EPS forecast and our roll forward of the valuation year.

BAB reported its first core net losses of RM6 million in the third quarter ended Sept 30, 2016 (3QFY16) after adjusting for various one-off items, namely the RM4.2 million impairment provision for available for sales financial assets, RM79.6 million allowance for doubtful debt, RM4.5 million foreign exchange losses, RM1.4 million retrenchment expenses and RM900,000 TP losses on derivatives.

The 9MFY16 revenue contracted 23.9% mainly due to the loss of Armada Claire contributions, lower contributions from APP, Armada Olombendo and Kraken nearing the tail end of their conversion stage and weaker offshore support vessel (OSV) utilisation. However, the negative impact was cushioned by higher activities from the Lukoil project in the Caspian Sea which saw offshore marine services (OMS) segment revenue grow by 9% year-on-year.

The 3QFY16 plunged into core net losses when BAB posted core net losses of RM6 million in 3QFY16 versus the core net profit of RM61.4 million in 2QFY16. Breaking down by segment, floating production storage and offloading (FPSO) registered a 25.5% lower revenue quarter-on-quarter as a result of the completion of conversion activities for Armada Olombendo.

This was partially offset by higher OMS revenue which grew 5.8% due to higher contribution from the Lukoil project and Armada Installer. Joint-venture contribution was also 60.7% lower due to lower conversion contribution from Armada Madura and weaker operations of Armada Sterling II.

We cut our FY16E EPS by 39.3% to reflect the slowdown in conversion activities, removal of APP revenue contribution as only the operating cost is being covered at present and lowering of our FPSO and OMS margin estimates. For FY17-18E, we made rather similar adjustments by removing the APP contribution and reducing our margin estimates, leading us to cut our EPS forecasts by 16.9% and 12.1% respectively.

During the 3QFY16 analyst briefing, management was rather cautious, guiding that maiden earnings contributions from three FPSOs (Olombendo, Kraken and Madura) should commence by 1QFY17. There is no update on the Armada Claire litigation case, while for both its Nigerian assets, APP continues to operate at a cash flow break-even level (meaning that clients are merely covering the operating cost of both FPSOs).

While management did not shed more light on the allowance for doubtful debt of RM79.6 million recognised this quarter, we reckon that this could be related to APP. Recall that in 4QFY15, management recognised an RM183 million allowance for doubtful debt. This continues to raise a red flag in terms of cash flow recoverability given BAB’s higher 3QFY16 net gearing of 1.38 times (versus 0.9 times in 4QFY15).

Meanwhile, Armada LNG Malta, Olombendo and Kraken are in the midst of being mobilised for their respective destinations. Management guided that hook-up commissioning generally takes an average of two months, hence it is targeting earnings and cash flow to start by late 1QFY17. Besides that, management is currently pursuing a few FPSO tenders in India, Vietnam, Nigeria, Ghana and Brazil, and sounded confident that these will be awarded in 2017.

We can expect earnings to be muted for the next two quarters as the FPSOs are being mobilised for their respective destinations. We cut our FY16-18E EPS by 12.1%-39.3% and derive our new sum-of-the-parts-based 12-month TP of 60 sen (from 64 sen previously) following our roll forward of the valuation year.

Key upside risks include stronger-than-expected OSV fleet utilisation, new FPSO contract wins, APP starting to recognising revenue as well as an increase in the transportation and installation activity level. Downside risks include any unforeseen operational hiccup with the new FPSOs. — Affin Hwang Capital Research, Nov 24