Results /Briefing

• Below expectations: Reported 3Q16 core loss of RM22.2m (excluding RM74.5m EI comprised of allowance for doubtful debts & unrealized FOREX gain), bringing its 9M16 core earnings to RM70.4m, accounting for 34.9% and 40.3% of our and consensus forecast.

Deviations

• Weaker than expected FPSO EBIT due to non-recognition of FPSO lease revenue on Claire, Perdana & Perkasa.

Dividends

• No dividend declared.

Highlights

• YoY: Core loss of RM22.2m was reported in 3Q16 against profit of RM44.6 in 3Q15 underpinned by reduced EBIT contribution Armada Claire (premature contract termination), Armada Perdana & Perkasa (due to non-payment of its clients) and lower conversion revenue from FPSO Kraken & Eni 1506.

• QoQ: Core loss was registered against profit of RM51.3m seen in preceding quarter (2Q16) due to reduction in conversion revenue of FPSO albeit being partially offset by stronger earnings performance from its OMS division driven by higher activities in the Lukoil project and higher utilisation rate of Armada Installer.

• YTD: Core PATAMI nosedived by 65% YoY driven by absence of revenue from Armada Claire, Perkasa & Perdana due to contract termination and reduced revenue contribution due to non payment of clients. OSV vessel utilisation has moved lower YoY due to persistently weak OSV market.

• The group has been recognising minimal revenue from Armada Perkasa & Perdana, which are located in Nigeria as the client has suspended production on the fields due to cash flow difficulties and has not been honouring the full 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.

• FPSO Kraken and Olembendo are at their final stage of conversion with completion rate close to 100%. However, we are expecting minimal contribution from these 2 assets in the near term as first oil on the separate fields would only be achieved in early 2017, another delay from our earlier expectations.

• Armada Claire litigation is still on-going with no definite timeline for the claimable amount to be received and finalized. We opine that this could take a while more but any fruition of compensation due to victory in the legal battle would provide a positive catalyst.

Rating

• HOLD

• Earnings prospects have weakened further due to underperformance of FPSO division. Recovery would be pushed back further in 2017 resulting in lack of near term catalysts.

Forecasts

• We cut our FY16/17/18 forecast by 74/34/26% to account for delayed contribution from upcoming projects (Kraken in particular) and weaker contribution from OSV business division.

Valuation

• SoP-driven TP is reduced to RM0.61 from RM0.85 previously post more conservative assumptions for the FPSO business. Downgrade to HOLD

Source: Hong Leong Investment Bank Research - 24 Nov 2016