KUALA LUMPUR (Sept 28): Analysts are positive on the two Indian contracts secured recently by Bumi Armada Bhd for its Armada Sterling Floating Production, Storage and Offloading (FPSO) vessel, as it provides earnings stability for the company.

Of the 16 research houses covering the stock, 10 have issued Buy calls, versus three Hold calls and three Sell recommendations, according to Bloomberg data. With the consensus target priced at 39 sen, Bumi Armada has a 47% headroom from its current share price of 26.5 sen.

Most have retained their calls on the stock, with some raising their target prices to factor in the future earnings contributions.

RHB Investment Bank Bhd analyst Sean Lim described the two contracts awarded by India’s state-owned Oil and Natural Gas Corporation Ltd (ONGC) as a positive surprise, as it enhances Bumi Armada’s cash flow visibility with longer duration, without compromising charter rates.

“We continue to favour the counter on better earnings stability, underpinned by improved Armada Kraken performance,” said Lim, who had a “Buy” call.

Lim has maintained the earnings estimates for the company, as the rates are similar to the previous extension contract. He increased the target price to 38 sen, after imputing a higher valuation from Armada Sterling at seven sen per share, assuming a 10-year firm period.

Lim has forecasted Bumi Armada’s net profit at RM364 million for the financial year ending Dec 31, 2020 (FY20), and RM394 million in FY21.

Kenanga Research analyst Steven Chan said: “Overall, we are positive on the contract awards, providing further earnings and cash flow visibility for the company, especially given the lengthened charter tenure under the new contracts.”  

No changes were made to Chan’s FY20/FY21 earnings assumptions, as contributions from the Armada Sterling FPSO have already been factored into the research firm’s numbers.

“We continue to like Armada, given its resilient earnings base, given its business as an FPSO operator being relatively less impacted by the current oil market down-cycle and pandemic outbreak,” said Chan.

However, he pointed out that the “Outperform” call for Bumi Armada is advocated on a “trading” basis, as the research firm is still not entirely comfortable with the stock’s high gearing levels on a long-term basis.

Chan is estimating a net profit of RM332.2 million in FY20, and RM356 million in FY21. 

Recapitalisation of balance sheet needed

As it is clear that Bumi Armada has a high gearing level, analysts said the company needs to prioritise efforts to restructure or refinance its loans to improve cashflow position.

PublicInvest Research analyst Nurzulaikha Azali said Bumi Armada’s net gearing of 2.8 times with total debt of RM9.4 billion as at June 2020 remains the key concern. Notably, RM679.6 million in unsecured term loans are due in May 2021, with cash currently at RM849.5 million.

“This development is positive for the group, as it provides visibility over the 10-year firm contract period as opposed to the original contract of annual six-year extensions,” said Nurzulaikha, adding that the lower charter rates are not a surprise, given the current operating environment.

“We had already considered a 10%–15% rate reduction for the contract after entering the extension period, hence no changes to our forecast,” she added, maintaining a Neutral recommendation on the stock, with an unchanged target price of 32 sen.

Most bearish on the stock is Maybank Investment Bank Bhd analyst Liaw Thong Jung, who maintained a Sell call on Bumi Armada, with a slightly higher target price of 17 sen.

Nothing that Bumi Armada’s highly-leveraged financials remains an ongoing concern, Liaw said the need to degear by monetising part of its FPSO/OSV assets, seeking redeployment opportunities for FPSO Claire, subsea construction vessels; installer & constructor and reducing expenses, takes priority over growth.

“We are positive of this charter extension for FPSO Sterling I. The new contract offers longer charter visibility (10 years) vs. its initial contract (six years, on annual extension),” said Liaw in a report today.

He, however, estimates that the revised dayrates are 15% lower than its previous contract, resulting in a 7% to 8% downward revision in FY21 to FY22 earnings estimates.

Bumi Armada has a market capitalisation of RM1.56 billion. Year-to-date, the counter has fallen some 50% from 53 sen.

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Bumi Armada bags two contracts in India worth RM2.1b