Results

• Below Expectations: 1Q16 core net profit (excluding RM17.9m impairment charged on Arm ada Condor, it’s T&I as s et) came in at RM41.3m, accounting for 11.1% and 13.8% of our and consensus forecasts.

Deviations

• Mainly due to lower charter recognition from FPSO Perdana’s client as it had trouble settling payments on their charters .

Dividends

• No dividend declared.

Highlights

• 1Q16 core PATAMI plunged by 48% YoY to RM41.3m affected by (i) lower contribution from Armada Claire post premature contract termination (ii) lower OSV vessel utilisation and (iii) lower O&M activity from Armada Installer in the Caspian Sea. The decline in earnings was however partially offs et by improvement in the group’s cost structure with its admin expenses contracting by 68.4% YoY due to the group’s cos t rationalisation measures.

• The group has been recognising minimal revenue from Armada Perkasa, which is located in Nigeria as the client has suspended production on the field due to cash flow difficulties and delayed its outstanding charter payments for the past 8 months. Nevertheless, production has recommenced in 2Q16 and payments on the FPSO bareboat charter are also expected to resume, implying potential improvement in FPSO earnings in 2H16.

• FPSO Kraken and Olembendo are at their final stage of conversion with completion rate close to 100%. However, we expect minimal contribution from these 2 assets in 2016 as first oil on the separate fields would only be achieved in late 2016, slightly later than we earlier anticipation. Notwithstanding, these assets would still be delivered within the timeline range as stipulated in the original contracts and no fines would be imposed on ARMADA.

• Its T&I assets have been consolidated with its Marine assets due to strategic reasons. For its OSV assets, 14 out of 49 vessels are still cold stacked despite slight improvement in activities in the quarter. The division is still cash flow positive in the quarter but we do not expect significant pick up in business in the remaining quarters. For T&I, Hawk and Condor are currently cold stacked while Installer continues to be active in the Caspian Sea.

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 and FY17 earnings are cut by 45.6% and 20.0% respectively to account for lower (i) EBITDA margins for some of its existing projects (Perdana & Perkasa) and (ii) delay in earnings contribution of Kraken and Olembendo to start in FY17 from mid-16 earlier.

Valuation

• SOP-driven TP is cut to RM0.85 from RM1.00 previously post cut in earnings. Maintain Buy on the stock. While its earnings delivery in 1Q16 disappointed, we believe that recent bash down in share price is overdone with the market ignoring value of its OSV assets which is still cash positive. There is also potential cash to be claimed on Armada Claire due to premature contract termination.

Source: Hong Leong Investment Bank Research - 1 Jun 2016