Bumi Armada’s reset for growth

BUMI Armada Bhd’s proposed capital reduction exercise, while aimed at cleaning up its balance sheet, also offers a glimpse into the peculiarities and challenges of the floating production, storage and offloading (FPSO) business.

The RM1.95bil capital reduction will eliminate accumulated losses, effectively restoring the company’s retained earnings to a positive RM498.59mil.

At the group level, retained earnings are set to rise by RM262.98mil to RM2.21bil, reflecting the broader impact across subsidiaries.

While this accounting treatment will help reset the company’s balance sheet, questions arise as to how it accumulated such high losses in the first place and whether similar risks could re-emerge in the future.

The FPSO business is well established in Malaysia, with listed players such as MISC Bhd, Yinson Holdings Bhd and Bumi Armada operating globally.

It is a capital-intensive business structured around large, project-based assets where risks are highly concentrated.

FPSO operators commit significant upfront capital, often funded through debt, and only begin to see returns once vessels are deployed under long-term contracts.

This creates a delicate balance between leverage and cash-flow visibility, says one industry player.

“Like peers such as Yinson, FPSO operators often carry high debt levels to fund capital-intensive projects,” he adds.

“While long-term contracts offer predictable revenue, operational performance remains critical, and even a single underperforming asset can materially affect overall results.”

Coming back to Bumi Armada, much of its accumulated losses can be traced to the Armada Kraken FPSO, deployed in the UK North Sea.

Intended to be a flagship asset, the vessel faced persistent operational challenges, particularly low uptime, which curtailed production and revenue.

This triggered sizeable impairment charges, including a one-off RM2.24bil write-down in the financial year ended Dec 31, 2018 (FY18), followed by further charges in subsequent years as performance continued to lag expectations.

Kraken’s charter contract ended in March 2025, with options for annual extensions until 2042.

From April 2025, the vessel’s daily charter rates fell by 70%, which was the main reason the company’s FY25 core net profit declined by about half year-on-year.

The capital reduction is designed to address these legacy issues, trimming Bumi Armada’s issued share capital to RM2.34bil from RM4.34bil (comprising 5.93 billion ordinary shares) as at end-February.

On the debt front, Bumi Armada has been strengthening its balance sheet over the past year.

The group generated robust operating cash flows of about RM1.04bil in FY25, enabling it to reduce total borrowings by more than half while maintaining a healthy cash cushion of roughly RM1.3bil by year-end.

Bumi Armada’s share price has struggled in recent years, falling close to 40% in the past year alone.

Investor sentiment was dented by operational setbacks such as the underperformance of the Kraken FPSO, as well as earlier disappointment over a proposed merger with MISC Bhd’s offshore business.

The deal, first explored under a memorandum of understanding in November 2024, ultimately fell through when the agreement lapsed in August 2025.

Notably, alongside the capital reduction, Bumi Armada is seeking shareholders’ approval for a share buyback mandate.

MBSB Research views the move as a signal that management is focused on enhancing shareholder value, particularly now that the balance sheet has strengthened and the stock may be undervalued relative to its underlying fundamentals.

The research house notes that the capital restructuring follows improving financial discipline and stronger cash flow generation, which enabled Bumi Armada to reduce total borrowings by about US$63mil, lowering leverage and finance costs.

This is supported by a sizeable and stable order book, which stood at RM7.9bil as of the fourth quarter of FY25, with optional extensions worth RM8.8bil.

These contracts are largely long-duration FPSO leases, which continue to form the core of the group’s earnings base.

The company currently operates seven FPSO units and one liquefied natural gas floating storage unit across Asia, Africa, and Europe, in addition to two construction vessels.

One project Bumi Armada is eyeing is the Tangkulo FPSO, which analysts say could serve as a near-term catalyst for a re-rating of the stock.

The field holds over two trillion cb ft of gas, with a final investment decision expected by mid-2026.

Bumi Armada is reportedly competing with another Malaysian-listed FPSO player for the front-end engineering and design (Feed) contract, a key early-stage assignment that lays the groundwork for full project execution.

Securing this contract would strengthen Bumi Armada’s position and help address concerns over its structurally depleting order book, analysts say.

At the same time, the group is gradually expanding beyond FPSO leasing, with plans to enter upstream ownership and development through two greenfield blocks in Indonesia: Akia, where it holds a 51% stake and serves as operator, and Kojo, in which it has a 100% interest.

These Indonesian blocks represent a longer-term growth opportunity.

By potentially deploying its own floating production systems, analysts say Bumi Armada could capture more of the project’s value chain.

This approach is particularly relevant for Kojo, a deepwater/ultra-deepwater field, where technical expertise and specialised assets could generate higher-margin returns if exploration proves successful.

While this means the projects carry exploration and execution risks – including potential delays, cost overruns, or sub-commercial discoveries – industry players say such upstream ventures can offer higher returns if successful.

“These blocks represent a strategic diversification opportunity,” says a retired industry player.

“Peers like Yinson have also pursued upstream ownership or integrated development strategies to capture more value beyond vessel leasing.

“However, such a pivot comes with inherent risks, including exploration uncertainty, deepwater technical challenges and long lead times before first production.”

Some market watchers are closely monitoring the potential need for future capital raising, although Bumi Armada’s improving cash flow, lower borrowings and proposed share buybacks suggest the current exercise is primarily focused on balance sheet optimisation and shareholder returns.

Maybank Investment Bank Research, in a March 13 report, notes that with an improved financial position and lower gearing, Bumi Armada has been able to initiate and sustain shareholder returns, paying a dividend per share (DPS) of one sen annually in FY24 to FY25.

It has imputed a stable DPS of one sen for FY26 to FY28, yielding about 3% yearly.

The stock is 34.55% owned by Objektif Bersatu Sdn Bhd, the private vehicle of the late tycoon Ananda Krishna.

Following the lapse of the proposed merger with MISC Bhd’s offshore business, the company has no active mergers and acquisitions plans and will focus on optimising its existing fleet.

Research firms currently have no “sell” calls on the stock, with nine “buy” and two “hold” recommendations.

While a return to past highs remains uncertain, the balance sheet reset is steadily restoring investor confidence.

At the time of writing, the stock was trading at 34 sen. Bloomberg consensus data shows a 12-month target price of 46 sen, with the most bullish estimate at 92 sen.