Bumi Armada Berhad's Improving ROCE and Efficiency as a Foundation for Sustainable Growth

In the volatile landscape of offshore energy services, Bumi Armada Berhad (KLSE:ARMADA) has emerged as a compelling case study in operational resilience. Despite a projected annual revenue decline of 9.4% over the next three years and industry-wide headwinds, the company's Return on Capital Employed (ROCE) has surged to 12% in 2025, up from 8.18% in late 2023. This improvement, coupled with a 26% reduction in capital employed over five years, underscores a strategic shift toward efficiency-driven growth. For investors, the question is whether this reinvention can sustain profitability in a sector where capital intensity and cyclical demand are persistent challenges.

A ROCE Renaissance: From Struggles to Strength

Bumi Armada's ROCE trajectory reflects a remarkable turnaround. In 2020, the company grappled with a debt burden and a 90-day low stock price of RM0.21. By 2025, however, its ROCE of 12% not only outperformed the 11% industry average for the Energy Services sector but also marked a 93% increase over five years. This growth was achieved while reducing capital employed—a metric that measures total assets minus current liabilities—by 26%, indicating a leaner, more agile business model.

The key to this transformation lies in the company's ability to generate higher returns with less capital. In 2025, Bumi Armada reported a net income of RM710.46 million, a 12.06% increase from 2024, despite a 25% drop in first-quarter revenue. This resilience is attributed to a 38.56% EBIT margin and a 42.39% profit margin, both of which highlight exceptional cost management and asset utilization. The company's gross margin of 57.03% further reinforces its pricing power and operational discipline.

Navigating Revenue Declines and Capital Reinvestment

While Bumi Armada's ROCE and margins are impressive, the company faces a paradox: declining revenue forecasts. Analysts project a 9.4% annual revenue decline through 2028, driven by reduced demand for floating production, storage, and offloading (FPSO) services and geopolitical uncertainties. However, the company's capital efficiency metrics suggest it can mitigate these risks through reinvestment.

For instance, Bumi Armada's EBIT of RM1.1 billion in 2025—up from RM646.1 million in 2024—demonstrates its ability to maintain profitability even as revenue contracts. The company has also extended contracts for key assets, such as the FPSO Armada TGT1, which secured a two-year extension worth $74.4 million. These extensions, combined with a 98% uptime record, underscore the value of its existing fleet and the potential for recurring revenue.

Critically, Bumi Armada's net gearing improved to 0.34x in 1Q25, reflecting disciplined debt management. This financial flexibility allows the company to reinvest in high-return projects without overleveraging. For example, its exploration of carbon capture and LNG trading in the UK positions it to capitalize on decarbonization trends, which could diversify revenue streams.

Strategic Realignment: The MISC Merger and Its Aftermath

A pivotal moment in Bumi Armada's recent history was the termination of its proposed merger with MISC Berhad in August 2025. The merger, initially framed as a way to combine FPSO fleets and achieve economies of scale, was called off after MISC concluded it would not fully meet strategic objectives. While this decision eliminated potential synergies, it also preserved Bumi Armada's autonomy to pursue its own growth path.

The termination, however, raises questions about the company's long-term capital reinvestment strategy. MISC's offshore fleet and project development expertise could have accelerated Bumi Armada's expansion. Yet, the company's standalone performance—marked by a 12% ROCE and a 45% shareholder return over five years—suggests it can thrive without external consolidation. Analysts at MBSB Investment Bank Bhd have maintained a “BUY” rating on Bumi Armada, citing its robust order book and financial strength.

The Road Ahead: Balancing Caution and Opportunity

Despite its progress, Bumi Armada must navigate near-term challenges. The FPSO Kraken, a key asset, has faced operational penalties and a 70% drop in day charter rates, which could pressure 2026 earnings. Additionally, the projected ROCE of 8.2% in three years—lower than the current 12%—hints at potential margin compression. However, the company's focus on cost optimization, asset efficiency, and diversification into LNG and carbon capture could offset these risks.

For investors, the key takeaway is that Bumi Armada's improving ROCE and operational efficiency provide a strong foundation for sustainable growth. While revenue declines and industry headwinds are real, the company's ability to generate returns from a smaller capital base and its strategic flexibility position it as a resilient player in a challenging sector.

Investment Thesis

Bumi Armada Berhad's journey from financial distress to capital-efficient growth is a testament to its management's strategic acumen. With a ROCE of 12% in 2025, a lean capital structure, and a diversified order book, the company is well-positioned to navigate industry cycles. Investors seeking long-term value should monitor its ability to sustain margins amid revenue declines and its progress in emerging markets like LNG and carbon capture. While the road ahead is not without risks, Bumi Armada's focus on reinvesting capital profitably makes it a compelling candidate for those willing to bet on operational resilience.