KUALA LUMPUR: CIMB Equities Research has reduced its sum-of-parts target price for Bumi Armada from 94 sen to 88 sen due to a six-month delay to Kraken’s final acceptance.

The research house also factored in US$100mil in assumed commissioning costs for the Kraken in FY17F (10% of its original US$1bil capex), and a higher cost of equity of 10% from 8% previously on account of higher-than-expected risks to Bumi Armada’s earnings. 

Stabilising the technical performance of the FPSO Kraken and achieving final acceptance for the vessel are the keys to the rerating of Bumi Armada’s share price.

CIMB Research said that Bumi Armada delivered a disappointingly low core net profit of RM62mil in 3Q17. 

“Although it turned around from a loss in 3Q16, we had expected core earnings to be larger since the 100% owned Kraken had achieved first oil on June 23 and earned an estimated 30%-40% of its full bareboat charter (BBC) rate while the 49%-owned FPSO Sterling 3 had achieved final acceptance on July 22, upon which it earned its full BBC,” it said. 

Bumi Armada’s 9M17 core net profit of only RM259mil implies that our previous FY17F net profit forecast needs to be cut by 30%. 

The key reason for the 3Q17 underperformance can be traced to a rise in quarterly depreciation expense to RM180mil, which was 30% higher on-year and 40% higher on-quarter. 

“We expect 4Q17F core net profit to be lower than 3Q because 1) BAB received an undisclosed one-off gain from a variation order on 50%-owned Sterling 1 in 3Q17, 2) this year’s work programme for Lukoil has finished, and 3) there is less OSV work as the monsoon season arrives. 

“This may be partly offset by a full-quarter contribution from Sterling 3 in 4Q17F and as the Olombendo may achieve final acceptance in 4Q17F (100% BBC compared to 80-90% BBC earned in 3Q17),” it said.  

CIMB Research said its sum-of-parts cut was the result of a six-month delay to Kraken’s final acceptance, 2) factoring in US$100mil in assumed commissioning costs for the Kraken in FY17F (10% of its original US$1bn capex), and 3) a higher cost of equity of 10% from 8% previously on account of higher-than-expected risks to Bumi Armada’s earnings. 

“Stabilising the technical performance of the FPSO Kraken and achieving final acceptance for the vessel are the keys to the rerating of Bumi Armada’s share price,” it said.