• We have maintained our HOLD recommendation on Bumi Armada but with a lower fair value of RM0.64/share (vs. RM0.69/share previously), based on a 50% discount to our

•             We have maintained our HOLD recommendation on Bumi Armada but with a lower fair value of RM0.64/share (vs. RM0.69/share previously), based on a 50% discount to our revised sum-of-parts (SOP) valuation of RM1.29/share.

•             Our FY16F-FY18F core earnings have been cut by 21%-62% on lower margin assumptions for the group’s floating production, storage and offloading (FPSO) division.

•             This stems from the group’s weaker-than-expected 9MFY16 core net profit of RM82mil (excluding asset impairments of RM598mil and doubtful debt provision of RM76mil), which accounted for 52% of our earlier FY16F earnings and 47% of consensus’s RM176mil. Note that our revised FY16F earnings forecasts are 34% of street’s estimates.

•             Recall that most of the asset impairments stemmed from FPSO Armada Claire, currently dry-docked in Batam while the rest came from the DP2 multipurpose vessel Armada Hawk and Dynamac shares.

•             Currently, among the 8 FPSOs and 1 floating storage unit, only the Vietnam-based Armada TGT 1 and India-based joint ventures are registering profits at this juncture. Recall that the group lost bare-boat charter contributions from the 2 Nigeria-based FPSOs Armada Perkasa and Perdana in the previous quarter.

•             Armada Olembendo has sailed away to Angola recently while Armada Kraken is undergoing quality checks and expected to move out soon. Hence, Armada Olembendo is likely to achieve first oil in 1QFY17 and Armada Kraken in 2QFY17. Any improvements in OSV utilisation, currently at below breakeven levels of 55%, will be gradual against the backdrop of prevailing oil price environment. Hence, we expect the group to continue to record losses for the next 3 quarters.

•             Bumi Armada registered a core net loss of RM13mil in 3QFY16 vs. a core net profit of RM57mil in 2QFY16 largely due to a 6% QoQ revenue decline as the progress billings for the conversion of Armadas Olembendo, Kraken and LNG Mediterrana together with Karapan Armada Sterling III have reached their tail end.

•             This was partly offset by lower losses for the Offshore Marine Services segment due to higher offshore construction activities  from the LukOil project in the Caspian Sea and Armada Installer. However, this segment, which will slow down due to the winter season, is likely to register higher losses in 4QFY16.

•             With the ongoing conversion capex, the group’s net gearing has surged to 1.4x currently from 1.2x in 2QFY16. The current net debt/(annualised FY16 EBITDA) of 13x appears to be much higher than the 7.5x debt ceiling covenant with the group’s financiers.

•             In the absence of large new contracts, the group’s order book was largely stable at RM37mil with firm order book at RM24.1bil with optional extension values at RM12.9bil. The stock currently trades at a low FY17F PE of 14x vs. the sector’s 20x due to concerns over counter party risks for the group’s existing projects amid high net gearing levels of 1.4x.