KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) has raised its financial forecasts for Bumi Armada Bhd by 9 per cent for 2024 (FY24) and 12 per cent each for 2025 and 2026 (FY25/FY26).
The revision is based on expectations of higher contributions and improved Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margins, particularly from the Sterling V and other joint venture (JV) assets.
On its outlook, HLIB Research noted that Bumi Armada has officially received the Final Acceptance for the Sterling V floating production storage and offloading unit (FPSO) on July 1, which will lead to the start of a bareboat charter beginning in the third quarter of 2024 (3Q24).
"However, we note that the depreciation expenses for the FPSO should kick in from 3Q24 onwards.
"Management confirmed that the first-year option period for Kraken FPSO (firm period due for expiry on March 31, 2025) has become firm, though we believe the charter rates will only be one-third of the firm period," it added.
HLIB Research noted that discussions are also underway with the client regarding the extension of the TGT1 FPSO charter, which is set to expire this year.
"Although Bumi Armada is poised to achieve record high earnings in FY24 with Sterling V's contribution, we view that it will peak this year given the steep decline in Kraken FPSO's charter rates from FY25 onwards.
"We were also guided that Bumi Armada would likely incur impairment charges relating to Kraken FPSO by end FY24, arising from mismatch between its net present value (NPV) vs. net book value (assessed annually) given the steep decline in projected cash flows in FY25," said the firm.
HLIB Research further noted that given Bumi Armada is expected to reach peak earnings in FY24, with the firm period of the Kraken FPSO set to expire in early 2025, the firm increased the equity risk premium for the stock.
"Consequently, this raises its weighted average cost of capital (WACC) to 10 per cent from the previous 9 per cent, to account for the heightened risk of earnings decline," it adds.
The research firm stated that after updating its valuation base year to FY25, it is downgrading the stock from a buy to a hold with a lower target price of 56 sen, from 78 sen.