Results / Briefing

• Broadly within expectation: 2Q16 core net profit (excluding RM17.9m impairment charged on Armada Condor, it’s T&I asset) came in at RM51.3m, bringing its 1H16 core earnings to RM92.6m, accounting for 45.8% and 43.0% of consensus forecast.

Deviations

• None

Dividends

• No dividend declared.

Highlights

• YoY, core net profit plunged 33.8% to RM41.3m in 2Q16 due to (i) drop in FPSO revenue caused by non-recognition of revenue from Armada Perkasa & Armada Perdana on the back of reduction in cash payments by clients, (ii) slump in OSV vessel utilisation in line with drop in industry activities, and (iii) lower overall T& I asset utilisation with only Armada Installer being utilised in the quarter under review.

• QoQ, core PATAMI surged by 24% underpinned by (i) stronger revenue from OMS division QoQ due to improvement in asset utilisation as activities pick up and higher activities from the Lukoil project for Armada Installer.

• Ytd, core PATAMI nosedived by 41% YoY caused by absence of Armada Claire contribution post premature contract termination and lower OSV and T&I asset utilisation post downturn in the industry.

• The group has been recognising minimal revenue from Armada Perkasa & Perdana, 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. However, these 2 assets are now cash flow neutral with cash flow received from clients covering their basic cash costs with zero debt outstanding, minimizing cash flow risk for the group.

• 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 anticipated.

• 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 upcoming 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

• Maintained

Valuation

• SoP-driven TP is maintained at RM0.85. Maintain Buy on the stock.

Source: Hong Leong Investment Bank Research - 29 Aug 2016