KUALA LUMPUR (June 27): Hong Leong Investment Bank (HLIB) Research said it upgraded Bumi Armada Bhd (BAB) to “Buy” (from “Sell”) with an unchanged of target price of 54 sen, as it believes the risk and reward ratio of the stock has turned attractive following a 25.6% plunge month-on-month.

In a technical tracker on Tuesday (June 27), the research house said that to recap, BAB announced that the group’s heavyweight Armada Kraken FPSO, which accounted for approximately 35% of the group’s FY22 revenue, was shut-in following the failure of critical hydraulic submersible pump transformers.

“While the exact duration of downtime and financial impact were not disclosed at the time of the announcement, we have made an arbitrary assumption of a six-month downtime for the said FPSO, resulting in a 38% cut in FY2023F earnings.

“The lack of clarity from the management, coupled with the anticipated negative impact from the FPSO shutdown, triggered a knee-jerk rout as investors sought to de-risk their portfolios,” it said.

HLIB said given the subsequent slide in the share price, most of the negatives would have now priced in and present an opportunity for bottom fishing.

“It is worth noting that our assumption of a six-month downtime appears to be conservative, as BAB recently announced on June 21, 2023, that the Armada Kraken FPSO has resumed operations and is currently running at 60% of its pre-shutdown production levels.

“If the earnings impact proves to be less severe than our initial estimation and market expectations, the upward adjustment in BAB's consensus earnings could lead to an upswing in BAB's share price.

“Technically, BAB is grossly oversold, with indicators on the mend. A successful breakout above 48 sen immediate resistance will spur prices toward 50 sen -54 sen-57 sen. Cut lost at 39 sen,” it said.