Kenanga Research retains underperform for Bumi Armada

Kenanga Research is retaining its underperform for Bumi Armada with a target price of 18 sen due to its high gearing and that significant cash raising is still necessary.

KUALA LUMPUR: Kenanga Research is retaining its underperform for Bumi Armada with a target price of 18 sen due to its high gearing and that significant cash raising is still necessary.

It said on Tuesday the improved 1Q19 results came in within its expectation, helped by an uptime recovery in Armada Kraken FPSO, after being plagued with operational issues for much of last year.

“Reclassification of several short-term debts to long-term has diverted immediate default risks for the time being, but balance sheet still remains highly saddled at 2.7 times net-gearing, with significant cash raising efforts still necessary,” it said.

Kenanga Research said the 1Q19 core net profit of RM73.3m (after adjustments for non-core items from reported net profit of RM62.2m) came in within expectation at 23% of its full-year forecast. 
However, the earnings were slightly above consensus at 31%, possibly due to consensus’ overly conservative view on Armada Kraken FPSO. 

Sequentially, core net profit recovered 53% QoQ, mainly helped by higher contribution from Armada Kraken FPSO (to recap, the vessel was plagued with operational issues throughout most of last year, thus hindering contributions from the FPSO). 

However, this was partially offset by poorer offshore marine services (OMS) as the LukOil project in the Caspian Sea reached completion in December 2018.

“YoY, Core Net Profit jumped 174%, mainly helped by: (i) expansion in margins from depreciation savings (-20%) following massive impairments of RM2.5bil recognised last year, on top of corporate costs savings, and (ii) lower effective tax rate due to recognition of deferred tax assets, namely in Karapan Armada Sterling III. 

“However, the better results were achieved despite poorer performance from both its segments; (i) FPO segment dragged by lower contributions from Armada TGT FPSO after an extension agreement in August 2018, and (ii) poorer OMS segment due to LukOil project’s completion in December 2018.

“Positive takeaway from this quarter’s results is the early signs of recovery from Armada Kraken FPSO, after having suffered numerous operational issues most of last year. In fact, certain news reports have suggested that Kraken should be on-stream and producing ahead of schedule moving into 2Q19. 

“Meanwhile, the group had also managed to avert an immediate default risk via the securement of debt refinancing back in April 2019. Of the RM6.8b short-term debt in its books as at end-1Q19, we believe RM4.2bil is due for reclassification into long-term debt next quarter, consisting of: (i) unsecured term loans and revolving credit, amounting to RM2.7b, via said refinancing, and (ii) Sukuk, amounting to RM1.5b, after receiving waiver on the covenant breach from Sukuk holders. 

“However, this still does not help mitigate the fact that its net-gearing remains at an alarmingly high level of 2.7 times. 

“We believe the company would still need to focus its efforts on raising substantial cash via (i) significant improvements in operational efficiencies, and (ii) monetisation of assets, before its debt problem can be fundamentally resolved over the longer-term. 

"Additionally, the group has also still yet to disclose a finalised plan on how it will raise funding for its equity portion of the ONCG contract secured earlier this month,” Kenanga  Research said.