Blog, Stock Take

Bumi Armada (KLSE: Armada)

Bumi Armada share price took some serious beating since its 1 year high of RM0.84 to RM0.16. That is a whooping 90.5% dip! According to Star Online, the selldown could be due to their 3Q18 financial performance and internal memo issued by CEO which states,

..despite the company’s concerted efforts to fundamentally improve the company’s financial situation, the company has not made substantial progress with the financial parties involved resulting in the company being forced to drastically reduce the company’s cash outflow and limit the company’s efforts to pursue new work..

Its Business

Bumi Armada is a Malaysia-based international provider of offshore production and support services with a presence in over 17 countries, spread across five continents

They provide services via two business units – Floating Production and Operation (FPO) and Offshore Marine Services (OMS)

Financial results from 3Q18 report

Bumi Armada recorded a profit loss of  RM 502M in 3Q18, which is a 508% fall from its 3Q17 net profit. The following are some of the contributing factors

  • Revenue fall by 8.2% from 3Q17.
  • RM 563M impairment due to depreciation of its asset’s (namely, vessels under their ownership) fair value. Discounting impairment, it records a net profit fall of 59% from 3Q17.
  • Increase in administrative expenses and selling cost by 43%.

Now, lets take a peek into their balance sheet

  • Property, Plant and Equipment value depreciated due to impairment
  • Trade receivables increased due to higher billings made to customers and financial lease increased as Kraken achieve final acceptance upon which Bumi Armada charges its client a full daily charter rate. Both trade receivables and financial lease increase by 74% from last 3Q17. This largely help to minimise the impact from its asset impairment.
  • Current liability exceeds current asset value due to reclassification of Kraken FPSO borrowing. Theoretically, in the short term, the company has insufficient asset liquidity to pay off its liability.
  • Its price to book value (P/B) is < 0.81, which indicates that its share price is selling at a discount against its asset value. Theoretically, an investor will make a profit from the liquidation of the company’s assets.

On a slightly brighter side, its free cash flow (FCF) improves to RM258M from a negative position in 3Q17. But their borrowing cost (i.e. interest rate paid for borrowing) is 2.36 higher than its FCF. This means cashflow from operation is unable to fully pay off their yearly borrowing cost and the company is forced to dig into their cash reserves.

Does it have durable competitive advantage?

Since 2014, the company’s capital expenditure exceeds its net income. This shows that the company needs to continue investing on new assets to continue income generation. As a comparison, durable competitive advantage companies such as Coca-Cola, Pepsico and Procter & Gamble keeps in capital expenditure over net income below 50% ratio

Debt to shareholder’s equity exceeds a ratio of 1. Based on Warren Buffet’s rule, durable competitive advantage company has a ratio of  < 0.80. High debt to shareholder equity puts shareholder at risk of having serious debt repayment obligation in order for the company to sustain its business.

Its services is highly dependent on oil & gas market cycles. Oil price has been under pressure due to geopolitical tension and advancement of technology. With technological advancement such as shale and tar sand oil, oil majors are moving away from the highly complicated and dangerous offshore exploration. This has significant impact to Bumi Armada’s business model which is to lease their FPSO for offshore oil production.

Although its P/B ratio <1 looks attractive, the company’s business model is subjected to continuous pressure from low oil price and increasing interest rate. Until the company is successful in its debt re-structuring and O&G market sentiment improves, we should not be tempted to invest in it because of its low P/B ratio.

Share with me your comments in the section below. You can also look into my stock take for Dialog Berhad (KLSE: Dialog)

Disclosure: I do not own stocks in Bumi Armada when this article was written. Any information, commentary, recommendations or statements of opinion provided here are for general information purposes only.

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