Bumi Armada’s outlook dependent on outcome of talks with creditors

Bumi Armada has a total of 4 ‘Buy’, 9 ‘Hold’ and 3 ‘Sell’ recommendations from analysts


ANALYSTS downgrade their recommendation on Bumi Armada Bhd — which is controlled by tycoon T Ananda Krishnan — after the support services group to the oil and gas sector reported its third consecutive quarter of loss.

The offshore oil field services provider posted a net loss of RM1.26 billion for the fourth quarter ended Dec 31, 2018 (4Q18), against a net profit of RM63.82 million in 4Q17.

Analysts were quick to act on the data. A check on Bloomberg data shows that Bumi Armada has a total of four ‘Buy’, nine ‘Hold’ and three ‘Sell’ recommendations from analysts.

JF Apex Securities Bhd analyst Lee Cherng Wee downgraded Bumi Armada to ‘Hold’ and reduced its target price (TP) to 35 sen from a previous TP of 60 sen.

“Recommendation and TP were cut based on the financial year 2019’s (FY19) earnings per share (EPS) pegged to a 40% discount on its three-year mean price-to-earnings ratio of 13.6 times due to concerns over its debt refinancing.

“Other challenges are crude oil prices and execution risks,” he noted in a research report last Friday.

Bumi Armada has been reporting losses since 2Q18 with RM585.48 million followed by a RM502.82 million loss in 3Q18.

The widening losses were due to higher impairments on Armada Kraken Pte Ltd — a floating production, storage and offloading vessel (FPSO) — and certain vessels, as well as higher finance costs.

Quarterly revenue slid 13% to RM576.31 million compared to RM662.15 million in 4Q17.

For the full year, Bumi Armada reported a net loss of RM2.3 billion against a net profit of RM352.25 million in FY17, though revenue rose slightly to RM2.42 billion from RM2.4 billion in FY17.

Lee added that the latest round of kitchen sinking came after an impairment of RM563.5 million on its offshore support vessels (OSV) in 3Q18 and RM477 million impairment on Armada Kraken in 2Q18.

“Excluding the impairments, Bumi Armada posted a normalised net profit of RM34.3 million, down 54% year-on-year, due to lower revenue and higher operating cost,” he stated.

Lee noted that the group’s FY18 normalised net profit of RM352.2 million exceeded his full-year net profit estimate of RM267 million, while revenue for the same period achieved 99% of the research firm’s FY18 forecast.

“We are keeping our earnings forecast for FY19 and FY20,” he added. On Bumi Armada’s debt refinancing, Lee highlighted its management is in negotiations with its lenders.

“Failure to secure refinancing could see Bumi Armada being forced to raise funds via rights issue,” he said.

Bumi Armada’s potential upside lies in the possible compensation of US$280 million (RM1.14 billion) from the Armada Claire court case, which has commenced recently, according to Lee.

The counter closed half a sen or 2.78% lower at 17.5 sen last Friday. Its share price has declined 80% in the past 52 weeks. Bumi Armada trades at 3.2 times its estimated EPS for the coming year.

AmInvestment Bank Bhd lowered its fair value on Bumi Armada to 20 sen from 30 sen previously based on a higher 30% discount to sumof-parts value of 33 sen a share for the group.

“The 30% discount is due to the company’s unresolved US$380 million short-term loan repayment against the backdrop of an additional debt repayment of RM926 million scheduled for this year,” analyst Alex Goh stated in a research note last Friday.

Goh stated Bumi Armada’s FY18 core net profit at RM217 million was above AmInvestment’s forecast, but within consensus’ expectation.

He said the core net profit excluded impairments of RM2.5 billion for Kraken, OSVs and trade receivables.

“Given the group continues to be buffeted by Kraken’s weak operational delivery, we maintain our FY19F–FY20F earnings, which are 30%–50% below consensus.

“A key issue remains the operational uptime for the FPSO Kraken, which continues to be adversely affected by technical issues since achieving first oil in June 2017,” he added.

This has led to lower charter revenue for Bumi Armada and Goh is uncertain whether the management is able to fully resolve these issues, which could translate to further impairments this year.

Affin Hwang Investment Bank Bhd, however, has maintained its ‘Buy’ stance on Bumi Armada on a few factors.

“Bumi Armada’s profit was in line, hinted on no rights issue and (with the) debt refinancing seems close to a deal — were among the positives. However, sentiment was dragged down by the huge impairment,” its analyst Tan Jianyuan wrote.

He slashed its earnings to factor in the weaker offshore marine services (OMS) segment in 2019.

“Taking into consideration the delay in subsea vessel deployment following the expiry of contract last year, we slash our FY19-FY20E earnings by 20% and 7%.

“We lower our TP to 28 sen from 55 sen and maintain the ‘Buy’ call with the underlying belief that talks with its bankers would end on a positive note,” he said.

Risks to this view include weaker than expected OSV fleet utilisation, continuous late deployment of subsea vessels, termination of existing FPSO contracts and failure to refinance the existing US$380 million term loan due by May.