Earnings dragged by Kraken shutdown

Results

• Lowest quarterly earnings since 3Q20 - Bumi Armada’s 2Q23 PATAMI dropped 36% YoY to RM118.8m while revenue plunged 29% YoY to RM441.3m following its floating production storage offloading (FPSO) Armada Kraken’s shutdown in end-May.

• Production restored - To recap, the Kraken’s production dropped to 0% after the failure of three critical hydraulic submersible pump (HSP) transformers on 29th May. Bumi Armada subsequently restored production levels to 60%, 90% and 100% in June, July and August respectively by refurbishing the HSPs. Next month, two new transformers will be installed.

• Declined QoQ – Compared to the previous quarter, 2Q23 net profit decreased 41% QoQ amid lower revenue (-19% QoQ) due to Armada Kraken’s shutdown, which overshadowed disposal gains from Armada Claire, lower finance costs and lower tax.

• Steady operations – Despite the Kraken’s shutdown, other FPSOs and floating storage units (FSUs) are operating near full capacity. Meanwhile, Bumi Armada’s 30%-owned FPSO, Armada Sterling V was moored at offshore India and is awaiting its final acceptance test with first oil expected in October.

• Pressured margins – As a result of Kraken’s shutdown, net profit margin decreased to 27% from 37% in 1Q23. Similarly, operating margin was lower at 39% vs 48% in 1Q23.

• Steady orderbook – Following the contract extension of Armada Sterling II FPSO, Bumi’s orderbook remains steady at RM11.2b vs RM11.1b in 1Q23 with potential extension worth RM9.7b. The FPSO orderbook can sustain the group’s earnings for the long term with three FPSO contracts expiring in 2025 while another four contracts are in longer tenure.

Earnings Outlook/Revision

• Results below expectation – 1H23 net profit achieved 44%/43% of our/consensus full year forecast while six months’ revenue was also below expectation after hitting 39%/44% of our and consensus FY23 forecast.

• Forecasts reduced – We are reducing our revenue and net profit forecasts for FY23 by 7.8% and 8.2% respectively to account for Kraken’s shutdown.

• Continuously lower gearing – Net debt was reduced to RM4.13b from RM4.34b in 1Q23 after the company repaid borrowings of RM409m in 2Q23. This effectively reduced net debt to equity from 0.82x in 1Q23 to 0.72x, the lowest since 2Q15. Meanwhile, net debt to EBITDA was slightly higher at 3.07x vs 3.03 in 1Q23 due to lower EBITDA.

Valuation & Recommendation

• Upgrade to HOLD with a higher target price of RM0.57 (previously RM0.48) – Our target price is based on its base its 3- year average P/B and FY24f BVPS. We like the stock for its earnings momentum and continuous effort to lower gearing.

• Risks: Unable to secure contract extensions, contracts cancelled by clients and further problems at Kraken.

Source: JF Apex Securities Research - 28 Aug 2023