PETALING JAYA: Although Bumi Armada Bhd has received a contract extension worth billions of ringgit, analysts have mixed views due to the company’s debt level and the overall challenging outlook for the oil and gas industry.
Maybank IB Research said Bumi Armada’s “highly” leveraged financials remain an ongoing concern and that it would need to de-gear through asset monetisation and reduction in expenses.
“Bumi Armada needs to prioritise efforts to restructure or refinance its loans to improve its cash flow position, ” it said in a report yesterday.
While the research house said it was positive on Bumi Armada’s recent contract extension for its Armada Sterling FPSO (floating production storage and offloading vessel) in India, the rates are 15% lower than its previous contract.
As such, it has revised downward the company’s profits for FY21 and FY22 estimates by 7% to 8%.
However, CGS-CIMB Research has raised its earnings forecast for Bumi Armada’s FY20-FY22 by 8%-12% due to a longer depreciation period of its Armada Sterling FPSO.
“Previously, the vessel was depreciated over a 13-year useful life corresponding to the original 7+6 year contract, but the new Oil and Natural Gas Corp Ltd (ONGC) contract will allow the vessel to be depreciated over a further 15 years, potentially halving the annual depreciation expense, ” the brokerage said.
CGS-CIMB had raised its target price on Bumi Armada Bhd to 44 sen from 40 sen previously.
This comes as it expects the extension of the group’s 50%-owned Armada Sterling FPSO charter to provide additional certainty to its cash flow.
It is noteworthy that the original charter by India’s state-owned ONGC was for seven years and six annual options from April 2013 onwards, with the group recently reaching the end of the seven years in April 2020.
ONGC decided not to exercise the six annual options, as it is extending the charter of the vessel for another 10 years and five annual options.
Last week, two of Bumi Armada Bhd’s joint venture companies were awarded contracts worth RM2bil by ONGC.
“We view this award positively as the contract award will not only reaffirm Bumi Armada’s speciality in providing FPO services but also provide better future earnings and cash flow visibility and insulate the company from the current volatile operating climate brought upon by Covid-19, ” MIDF Research said.
It has increased Bumi Armada’s earnings for FY20 to FY22 by 5.8%, 5.4% and 8.6%, respectively, after imputing the contribution from the new contracts and lower cost of depreciation.
Meanwhile, UOB Kay Hian Research pointed out that Bumi Armada’s loan default risk remains especially with the incoming tranche 1 repayment of debt of RM679mil by May 2021.
“Although the FPSO division is gradually gaining a better earnings outlook, these projects will only benefit the direct repayment of the RM5bil to 6bil project loans.
“Essentially, we do not expect the remaining RM3.4bil corporate loans to benefit at all from the improving FPSO outlook, including this new contract win, and these loans may face the risk of getting restructured again, ” it said.
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