A file picture shows Bumi Armada
KUALA LUMPUR: AmInvestment Bank Research has upgraded its recommendation for Bumi Armada
to Hold from Sell as the share price has fallen to its unchanged fair value of 69 sen a share while it sees a turnaround for the oil and gas services company in 2017.
It said on Tuesday the turnaround for the group’s earnings will start in FY17F when the group’s four major projects start commercial operations.
“In the absence of new contracts together with the termination of the Armada Claire FPSO charter, the group’s firm order book has decreased by 12% to RM24bil from RM27.5bil in 4QFY15 from absence of new contracts while optional extension values have fallen by 20% to RM12.2bil from RM15.3bil,” it said.
AmInvestment said the share price was trading at a low FY17F price-to-earnings (PE) of nine times versus the sector’s 16 times due to concerns over counter party risks for the huge Kraken project amid high net gearing level of one times.
The research house said while its lowered our sum-of-parts (SOP) valuation by 10% to RM1.38 a share, its discount to SOP has also been reduced to 50% from 55% as the group’s major projects are nearing completion.
“We have cut FY16F-FY18F earnings by 8%-49% due to reduced revenue recognition from the four major conversions projects in Keppel yard, Singapore – the floating production and storage and offloading vessels Armada Kraken, Armada Olombendo and Karapan Armada Sterling III together with the floating storage unit Armada LNG Mediterranna,” it said.
The research also lowered its charter rate assumptions by 20% for offshore support vessels (OSV) while utilisation rates have been halved for the transport and installation (T&I) segment, as the Armada Hawk and Armada Condor have been cold stacked since 4Q15 and 1Q16 respectively.
Excluding one-off impairments of RM18mil for the impairment of Armada Condor vessel, the group’s FY15 core net profit of RM41mil was way below expectations, accounting for 12% of its earlier FY16F earnings and 14% of consensus’s RM299mil.
Bumi Armada’s 1QFY16 core net profit fell 71% on-quarter and 48% on-year due to a 50% drop in Armada Claire contributions.
There was also reduced contributions from EnQuest’s Kraken FPSO Eni’s Armada Olembendo 1506 FPSO and Malta-based Armada LNG Mediterrana floating storage unit conversion projects and the Madura FPSO as these projects are nearing completion with deliveries expected in 3Q-4QFY16.
“This was exacerbated by non-contribution from the DP2 multi-purpose vessels Armada Hawk and Armada Condor, which was impacted by the absence of offshore construction work together with the continuation of a low OSV utilisation of 46%, unchanged from 4QFY15.
“For the rest of FY16F, we do not expect any significant recovery in earnings as the major conversion projects are already at the tail end while any improvements in OSV utilisation will be gradual against the backdrop of prevailing low charter rate environment,” it said.
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