Investment Highlights

• We maintain BUY on Bumi Armada with a slightly higher sum-of-parts (SOP) based fair value of RM0.84/share (from RM0.83/share previously). Our fair value also reflects a neutral ESG rating of 3 stars.

• Bumi Armada's 9MFY22 core net profit (CNP) of RM651mil (after excluding RM74mil net fair value loss on property, plant and equipment as well as an RM8mil unrealised forex gain) came in above expectations at 94% of our earlier FY22F net profit and 93% street's estimate.

• The net fair value loss on property, plant and equipment was mainly due to downward revisions of residual value of vessels due to lower expected scrap values and an increase in a FPSO vessel’s useful life.

• Subsequently, we raise our FY22F–FY24F earnings by 11%– 13% mainly to account for higher EBIT margins on the floating production operation (FPO) division and lower finance costs.

• The group’s 9MFY22 CNP increased by 9% YoY on the back of an equivalent rise in revenue to RM1.8bil, coupled with lower depreciation charges and finance costs, which mitigated a lower share of joint ventures (JVs) and associates’ results.

• QoQ, 3QFY22 revenue grew 26% to RM653mil mainly due to higher progress of completion of subsea construction contract work in the Caspian Sea and higher preliminary front-end engineering and design (Pre-FEED) revenue, coupled with stable contributions from its FPO operation.

• Notwithstanding the higher revenue, 3QFY22 CNP fell by 14% QoQ, mainly weighed down by a lower share of results of JVs and associates. Note that the share of JVs and associates’ results of RM3mil (after stripping off RM46mil net fair value losses in vessels) plunged by 90% QoQ, due to higher tax provisions in the current quarter.

• Meanwhile, its 30%-owned Armada Sterling V (the remaining 70% owned by Oil and Natural Gas Corporation) has sailed away in early November this year and is expected to arrive in the east coast of Kakinada, offshore India by the end of 2022. This paves the path for maiden earnings contributions from the vessel from 1QFY23 onwards.

• Meanwhile, the group's firm order book remains largely unchanged at RM13.0bil as at the end of 3QFY22. Combined with optional extensions worth RM9.9bil, this translates to a comfortable 10x of FY22F revenue.

• Bumi Armada’s short-to-medium term outlook remains promising as we anticipate the group to secure TotalEnergies’ Cameia FPSO vessel project in the coming months. To recap, Upstream Online reported in September this year that the group has emerged as the frontrunner to provide a FPSO unit to the CameiaGolfinho project, offshore Angola.

• It is also well-established that the project would only entail engineering, procurement, construction, installation and commissioning works, with an estimated project cost of at least US$1bil. The vessel is also anticipated to be equipped with a production capacity of 100,000 barrels of oil per day, as well as targeted to reach first oil by 2025.

• Valuation-wise, we see more potential upside in Bumi Armada in view of its FY23F PE of 3x vs. the FBM KLCI's 16.5x. This is underpinned by sustainable core earnings with the normalisation of Armada Kraken's operations.

Source: AmInvest Research - 24 Nov 2022