While there may be a negative share price reaction towards Armada Kraken’s shut-in event, RHB Research (RHB) is still on the assumption that such an issue will be resolved in the short term, and, as such, they do not expect a lumpy vessel impairment. RHB maintains the Buy call.
“We continue to like Bumi Armada (BAB) for its attractive valuation and strengthening balance sheet, led by stable floating production storage and offloading operations and consistent debt repayment,” said RHB in the recent Malaysia Company Update Report.
Last Friday, BAB announced that production from the Armada Kraken floating production storage and offloading was recently shut-in following the failure of the critical hydraulic submersible pump transformers.
The attempted remediation programme was unsuccessful and the company is working with Enquest to resume production on a phased basis in the coming weeks.
BAB has also brought forward its key maintenance activities, originally scheduled for execution in quarter three 2023 during the period of shut-in.
Armada Kraken has been delivering a steady performance in the past few years after it faced technical challenges in 2018. According to Enquest, the vessel delivered top quartile performance, with production efficiency and water injection efficiency both at 94% as at end-April.
It is currently unclear what the earnings impact will be from the disruption as it largely depends on how soon the vessel can resume production.
“We estimate Armada Kraken to contribute about 30-35% of financial year 2023 future earnings. As such, we cut our financial year 2023 future earnings by 14% assuming a 3-month disruption coupled with additional maintenance costs arising from this event,” said RHB.
While there may be a negative share price reaction on the stock, RHB is still on the assumption that such issue will be resolved in the short term, and, as such, RHB does not expect a lumpy vessel impairment.
Recall that BAB has provided RM1.6 billion impairment charge on Armada Kraken in 2018 when the vessel had a technical failure which affected its uptime availability.
“We cut our SOP-based trading price to RM0.73 from RM0.80 post earnings adjustments and impute a 10% discount to our Kraken valuation coupled with the incorporation of a 6% environmental, social and governance discount, based on our ESG score of 2.7,” said RHB.
Note that Armada Kraken accounted for more than 30% of their valuation and any long term disruption would present a downside risk to their trading price.
Downside risks identified by RHB are contract cancellations, failure to win new contracts, and a further deterioration in Armada Kraken’s operations.
