Brokers Report: BAB - Completion Of Major Conversion Phase

Maintain outperform recommendation with an unchanged target price (TP) of RM0.90

Bumi Armada’s (BAB) 9MFY16 revenue fell to RM1.2bn (-23.9% YoY), with a net loss of RM591.6m (->100.0% YoY). Excluding the RM597.6m impairment predominantly provided for Armada Claire, core earnings would be RM85.5m (-62.5% YoY). Below expectations, BAB’s earnings only met 30.0% and 48.9% of ours and consensus’ estimates. Revenue remained weaker YoY with the completion of conversion activities for Kraken and ENI 1506 FPSOs, coupled with lower contribution from Armada Claire, Armada Perdana and Armada Perkasa, albeit partly offset by higher contribution from LukOil in the Caspian Sea. EBITDA, in the same trend, was lower by 36.7% YoY. Average OSV utilisation rate maintained at 55% however. BAB’s performance was in a lull, but going forward we are expecting a boost in earnings from the 4 major FPSO & FGS contributions, seeing first oil and/or gas in 2017. We retain our Outperformrecommendation with an unchanged TP of RM0.90 derived by our DCF approach. The Group’s order book stands at a firm RM24.1bn with RM12.6bn optional extensions, predominantly in the FPSO and FGS segments.

• FPSO & FGS (9M Revenue -14.1% YoY). BAB posted a fall in revenue due mainly to the lower FPSO revenue from completion of conversion activities on the ENI 1506 in 3QFY16. EBITDA was subsequently lower >100.0% as there was also a reduction in earnings from JV operations of Armada Sterling II , lower conversion activities of Karapan Armada Sterling III (Madura) and allowance for doubtful debts of RM79.6m.

• OMS (9M Revenue -34.9% YoY) Average utilisation was maintained at 55%, which translated into higher revenue with more activities from the LukOil project in the Caspian Sea and Armada Installer. OMS performance partly offset the weaker performance of the FPSO and FGS division. Improved losses on a QoQ basis for the OMS division to RM5.9m from RM15.2m was attributed to higher contributions from the Armada Installer contract with Petronas. BAB will continue to manage this division with a particular focus on cashflows, to brace through this challenging period.

• Armada Claire. The litigation to claim c.USD283.5m for the purported termination is also ongoing at this juncture, but with no definitive conclusion timeline. No revenue was recorded for Armada Perdana and Armada Perkasa despite its progressing operations, due to the client being challenged with its payables to BAB as of last quarter. We reiterate that we could expect a significant back-logged accrued sum for both FPSOs to be accounted when payment from the client is more substantial.

• Maintain Outperform. For 2016, we had already anticipated weaker results as the Group’s main earnings drivers are at the tail-end stages of their conversion phases following the S-Curve progress billings. 2017 will see a boost in earnings from the 4 major FPSO & FGS contributions however, hence the reiteration of our Outperform call with an unchanged TP of RM0.90 based on our 10-year DCF with a WACC of 6.2%. We are nevertheless adjusting our estimates going forward to account for some project delays prior to the first oil/gas production, resulting in revenue and earnings assumptions being adjusted between -3% to -24% and -1% to -40% for FY16F to FY18F respectively.

Source: PublicInvest Research - 24 November 2016