Results/ Briefing

• Above Expectation: 4MFY15 core PATAMI (excluding impairment charges w orth RM45.5m, RM183.3m provis ion for doubtful debts and reversal of provision of variation orders for Armada Installer w orth RM40m) came in at RM103.7m, bringing FY15 core net prof it to RM305.1m, above ours and street’s f orecast by 21% and 6%.

Deviations

• Mainly due to stronger than expected performance f rom T&I segment due to stronger 4Q activities in the Lukoil project.

Dividends

• Final cash dividend of 0.82sen s share is dec lared for the year opposed to our expectat ions of no dividends. Dividend v isibility remains unclear in view of w eak O&G environment and high gearing.

Highlights

• 4QFY15 core PATAMI (excluding impairment charges and provision) fell by 66% YoY due to stronger performance f rom T&I division on the back of higher O&M activit ies and variat ion orders for Lukoil project and stronger FPSO revenue dereived f rom Kraken, Olembendo and Malta project. This is, how ever, being partially of fset by w eaker OSV div ision due to w eak OSV market environment.

• On a full year basis, FY15 core net prof it w as marginally dow n by 8.6% YoY attributed to w eakness in both T&I and OSV segments due to slow dow n in O&G activ ities. This is being partially of fset by stronger FPSO revenue due to higher conversion revenue f rom several of its upcoming FPSO project.

• While still being cash f low positive, OSV segment is expected to remain in red f rom P&L perspect ive due to low vessel utilisations (45-50% expected). This segment w ould only recover if the act ivities in the sector pick up substantially driven by higher oil prices.

• FPSO business remains the core business w ith cash f low streams expected to remain resilient in the next few years. How ever, w e opine that counterparty risk for FPSO contracts have r isen recently due to further oil price plunge to USD30/bbl levels. A small group of clients might face dif f iculty making full payments as they may be barely breaking even on its production costs.

• Nevertheless, ARMA DA’s counter party risks remain s mall f or the time being w ith majority of its clients being oil majors w ith relatively robust balance sheet. 2 of its main FPSO projects (Kraken & Olembendo) look set for sail-aw ay in June 2016 w ith high completion rate (80% & 70% respectively) and w ould be the main driver for FPSO earnings in 2017.

Risks

• Increased competition as new players enters the market.
• Execution risk, including oil spills and their clean-up costs.
• Plunge in crude oil price.

Forecasts

• FY16 earnings adjusted upw ards by 6% post full year housekeeping adjustment . FY17 core net prof it of RM591m is introduced assuming full year contribution f rom Kraken and Olembendo and losses f rom both T&I and OSV segment.

Valuation

• We believe the w eak out look of the sector is already ref lected in its share pr ice. Hence, w e maintain our BUY call w ith TP adjusted to RM1.17 (f rom RM1.15) post earnings adjustment based on SOP valuat ion method. Despite its headw inds, w e believe most of the negat ives on OSV and T&I bus iness have already been ref lected in the share price.

Source: Hong Leong Investment Bank Research - 29 Feb 2016