Bumi Armada Berhad - Results in Line despite Forex Headwind
Mon, 25-Nov-2024 07:05 am
by Ong Tze Hern • Apex Research

Counter

ARMADA (5210)

Target Price (RM)

0.76

Recommendation

Buy

Summary

  • 9MFY24 core net profit of RM766.8m came in within expectations.

  • Excluding exceptional items such as lumpy forex losses (-RM44.9m), 3QFY24 core net profit dropped 0.6% qoq contributed by weakening of USD against MYR, absence of variation order for Olombendo FPSO that was booked in 2QFY24, as well as the start of depreciation expense and finance costs for associate Sterling V FPSO.

  • The headline net profit in 4QFY24 may not look good for ARMADA due to expected impairment for Kraken FPSO flagged by management. Nonetheless, core net profit should improve qoq with expected stronger USD against MYR.

  • No change to earnings forecasts. Maintain BUY with unchanged target price of RM0.76 pegged to 0.6x FY25 BVPS.

     

Results Review

  • Within expectations. 9MFY24 core net profit of RM766.8m came in within our expectations but above consensus expectations, accounting for 77.0% of our and 85.5% of consensus full-year forecasts.

 

  • QoQ. Excluding exceptional items such as lumpy forex losses (-RM44.9m), 3QFY24 core net profit was 0.6% lower contributed by lower revenue (-4.7%) and lower share of results from JV and associates (-53.1%). Notably, revenue decreased qoq from weakening of USD against MYR and the absence of variation order for Olombendo FPSO that was booked in 2QFY24. The reduction in share of results was due to the commencement of depreciation expense and finance costs for associate Sterling V FPSO that has commenced first oil in 1 Jul 2024.

 

  • YoY/YTD. Core net profit surged 41.2% yoy and 75.1% YTD respectively, driven by revenue growth (+5.2% yoy, +17.0% YTD) and lower finance costs (-9.5% yoy, -10.3% YTD). Revenue advanced on the back of higher contribution from Olombendo FPSO supported by lumpy RM60m O&M revenue in 1QFY24, as well as higher contribution from Kraken FPSO as the asset experienced hydraulic submersible pump (HSP) failure in late 2QFY23 and only resumed 100% production in Aug 2023. The lower finance cost was due to the group gradually paring down its debts over the quarters. Total borrowing (including lease liabilities) as of 3QFY24 was RM3.7bn, much lower than RM4.4bn as of FY23. In 3QFY24, ARMADA’s short term liquidity risk was resolved after it secured USD400m loan with 6-year tenure, allowing the group to refinance its expiring RM1.5bn sukuk. 

     

Key takeaways from conference call:

  • Last impairment of Kraken FPSO in 4QFY24. Management flagged that Kraken FPSO will be hit by impairment in 4QFY24, albeit lower than that incurred in 4QFY23 (RM437m). The impairment was due to net present value of future cash flows dropping below the carrying value following steep decline in rates for option period by c.70% from firm period, commencing from 1 Apr 2025. However, management stressed that this is the last impairment for Kraken and will not recur again.

     

  • More conservative depreciation policy for Sterling V. To reduce the risk of impairment for Sterling V FPSO, management has adopted a more conservative depreciation policy. 80% of Sterling V’s carrying value will be depreciated over a 9-year firm period, while the remaining carrying value will be depreciated to a residual value of 2% over the 7-year option period. Management disclosed that Sterling V experienced a small loss in 3QFY24 after starting to register depreciation and finance costs, but is expected to contribute positively in mid to late-2025 due to lower debt principal, which would reduce Sterling V’s interest expense. 

     

  • Outlook. The headline net profit in 4QFY24 may take a hit due to expected impairment for Kraken FPSO. Excluding the impairment loss, core net profit should improve QoQ with expected stronger USD against MYR. Going forward, ARMADA’s orderbook at RM10.2bn with potential extension of RM9.5bn will provide the group with recurring income well into 2030. Notably, Kraken FPSO obtained extension of option period for one year (Apr 2025 to Mar 2026), and the charter rate has dropped c.70% from firm period, which could erode the group’s earnings in FY25. Nonetheless, with a much healthier balance sheet (net gearing of 0.5x as of 3QFY24) and the potential share-based merger between ARMADA and MISC, we believe this could allow ARMADA to have a better access to financing for new FPSO projects, which ARMADA has struggled to secure in the past few years.

     

  • Earnings Revision. No change to our earnings forecasts.

     

  • Valuation & Recommendation. Maintain BUY recommendation with an unchanged target price of RM0.76/share pegged to 0.6x FY25 BVPS (3Y historical mean).

     

  • Risks. Unable to secure contract extensions, contracts cancelled by clients, weaker-than-expected uptime from unexpected asset breakdowns.

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