AmInvestment Bank Bhd is upgrading its call for Bumi Armada to buy from sell with a higher fair value (FV) of 47 sen compared to 10 sen previously, based on its five-year P/BV trough of 0.2x.
According to AmInvestment, its FV is based on a 30% discount of the group’s sum-of-parts as there could be a possibility of additional impairments due to idle vessels, namely the two offshore construction units in the Caspian Sea.
In its first half ended June 30, 2020 (1H20), Bumi Armada recorded slight growth of revenue to RM1.15 bil from its previous RM1 bil in 1H19 (RM606.7 mil in 2Q20 versus RM535.6 mil in 2Q19).
The group’s earnings also experienced an increase to RM119.7 mil in 2Q20 from RM78.2 mil last year, driven by Armada Kraken’s improved operations. This is believed to stabilise the group’s debt repayments.
“We reckon Bumi Armada should be able to meet its debt repayment obligations, in which RM680 mil is due in the next 12 months. The proceeds should be internally generated from the FY20F EBITDA of RM1.2 bil and also due to collection from trade receivables which have risen by 60% over the past six months to RM671 mil,” AmInvestment Bank Bhd analyst Alex Goh said in an August 29 note.
Goh also said that 86% of Bumi Armada’s receivable level falls within its usual 60-day credit terms and expects trade receivables to progressively taper down towards the end of the year, which should further improve the group’s cash inflow.
However, the group’s main floating production and operation segment slid 3% quarter-on-quarter (q-o-q) to RM345 mil due to higher repair and maintenance costs for Armada Olembendo as well as forex losses. These costs were partly offset by the higher revenue derived from Armada Kraken.
Additionally, the 2Q20 results showed that Bumi Armada’s OMS revenue fell 6% q-o-q. Despite that, the management is still planning to monetise the OMS division, which is currently seen as a minor operation as it only accounts for 15% of the group’s 1H20 revenue.
“While the 12 vessels are currently cold-stacked, the group has not sold any of the OMS units during 2Q20 compared to the two vessels that were disposed of in 1Q20,” Goh said. “This is due to the Covid-19 pandemic which has restricted cross-border travels.”
Nevertheless, AmInvestment is raising its forecasts by 14% – 23% due to higher utilisation of the floating production, storage and offloading vessel Armada Kraken, as the unit has demonstrated the capability of sustaining production over the past two quarters.
“As the group has significantly improved core earnings over the past two quarters, we view the 45% discount to BV as unjustified,” Goh added.
At 1.05pm, Bumi Armada’s share price stood at 27 sen (17.39% increase) with a market capitalisation of RM1.59 bil.
