Excluding exceptional items amounting to RM481.9m, Bumi Armada (BAB) reported strong 4QFY23 numbers with core net profit of RM316.5m, higher by 73.3% QoQ and 42.8% YoY. The performance is attributed to full restoration of Armada Kraken’s performance and resolution of outstanding issues with the charterer. The impact of the resolution has various outstanding claims, reimbursable and unwinding provisions recognised, which has led to additional profits of RM70m. Due to the unexpected resolution, BAB recorded full year core net profit of RM756.4m, ahead of our and consensus estimates at 123% of full-year numbers. Separately, management is in discussions with clients for its firm FPSO contracts nearing expiry. On a positive note, its Armada Sterling V 98/2 has achieved first oil in January 2024 and is looking forward to achieving first gas by April 2024 while conducting commissioning process of the FPSO. We maintain our Outperform call and TP of RM0.65 as we expect its earnings to remain stable with continued improvement in its balance sheet.

• Huge impairment for Armada Kraken. Among the exceptional itemsaccounted for in the net expense of RM481.9m, BAB recorded RM514.4mof impairment losses, arising from Armada Kraken value-in-use (VIU)assessment. Despite there being no changes to its cash flow,management voluntarily assessed the asset given it is approaching end offirm contract period by March 2025 after 8 years of operations. The VIU issensitive to changes in discount rates used by management, of which anassumed 8.5% has resulted in a lower value than its net-book-value. Uponthe end of the initial contract period, the optional extension period of 17years will kicks-in, though usually with a 70% lower charter rate than thefirm period as the project financing has been fully repaid.

• Optimistic on contract extension. Management indicates that it is in themidst of discussion for contract extension for FPSOs that are near to expiry– Armada TGT I (end of 2024), Armada Sterling II (March 2025) andArmada Kraken (March 2025). For Armada Sterling II and Armada Kraken,both are high likely to be extended given the optional extension periodsare indicated in the contract. Armada TGT I also stands a chance given itis currently in extension period of six years until November 2024.

• 30%-owned Armada Sterling V 98/2 has achieved first oil in January2024. We are positive with this development, though slightly delayed frominitial schedule of end 2023. It is now looking forward to achieving first gasby April 2024. The FPSO is still conducting commissioning process priorto declaring Commercial Operation Date (COD) and commencing of fullcharter revenue. The project entails a 9-year firm contract period with 7-year contract extension.

Source: PublicInvest Research - 29 Feb 2024