“Our new target price of 15 sen is based on an 80% probability of a rights issue at 10 sen, and a 20% probability of a no-rights SOP valuation of 36 sen,” it said.
The research house said on Monday Bumi Armada’s core net profit of RM20.5m in 4Q18, and RM194m in FY18, were lower yoy.
While the Olombendo and Kraken FPSOs contributed a full year of earnings, and at higher nominal rates too, BAB had to pay a penalty to EnQuest in 4Q18 to compensate for the failure of the Kraken FPSO to achieve the mandated uptime rate.
OSV utilisation rates had also declined materially, while there was a lower volume of LukOil work in the Caspian Sea. In terms of the reported earnings, BAB suffered a significant RM2.3bn for FY18, due to a RM1.6bn impairment on the Kraken, RM587m impairment on the carrying values of the OSV fleet, and provisions against trade receivables and deposits of RM276m. RM1.3bn of these impairments were made in 4Q18 alone.
Bumi Armada has not been able to resolve the technical issues surrounding the Kraken despite continuous efforts since Feb 2017; in contrast, the research house had expected resolution and closure after its final acceptance in Sep 2018. BAB may have to incur out-of-pocket expenses to troubleshoot over many years, which it did not previously anticipate.
“The failure to achieve uptime requirements and the onerous penalties that follow the failure are also new to us. These penalties are alarming, since they impact cashflows and may make it challenging for Bumi Armada to repay its project finance debt.
“Project lenders have not yet waived their rights to demand for immediate repayment of the loans, which we see as a troubling sign. Hence, we now slash the base-case DCF value of the Kraken FPSO charter contract from 19 sen/share to a negative 15 sen/share, which is value destructive.
“We have turned pessimistic on Bumi Armada’s ability to walk the tightrope without a helping hand from shareholders. In addition to the Kraken issues, a decision by the Australian courts on the lawsuit against Woodside is expected only in Sep 2019, later than the initial Apr guidance, so Bumi Armada cannot rely on the court award to help it resolve its immediate liquidity issues,” it said..
CIMB Research also highlighted that due to the breach in a covenant, the RM1.5bn sukuk due in 2024 is now due immediately, unless sukuk holders grant an indulgence.
“Discussions to extend the May 2019 due date for US$380m in short-term debt are still ongoing; we think partial repayment may be required.
“Finally, Bumi Armada is keen to pursue the ONGC 98-2 FPSO project, in which it emerged as the only bidder with its Indian JV partner; the project may need Bumi Armada to contribute c.US$180m in equity capital,” it said.
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