Armada’s 1QFY18 core profit came in at RM107m, accounting for 28% and 24% of HLIB and consensus’ estimates respectively. The stronger than expected results were mainly due to lower than expected operating expenses. Core profit increased 74% yoy to RM107m mainly due to higher contribution from the Olombendo FPSO and Kraken FPSO, partially offset by lower OMS revenue contribution and lower contribution from JV. Kraken FPSO is currently producing 40,000 bpd and is expected to be granted final acceptance by 2Q18. We raise our FY18-19 earnings forecast by 5% after imputed lower operating expense assumptions. We introduce our FY20 forecast of RM424m. Upgrade to BUY recommendation with higher SOP-derived TP of RM0.90 (from RM0.79) post earnings forecast adjustment.

Results above expectation. 1Q18 core profit came in at RM106.8m, accounting for 27.6% and 23.5% of HLIB and consensus’ estimates respectively. The stronger than expected results were mainly due to lower than expected operating expenses.

YoY: Core profit increased 74.1% to RM106.8m mainly due to higher contribution from the Olombendo FPSO and Kraken FPSO, partially offset by lower OMS revenue contribution and lower contribution from JV. OMS revenue was lower due to lower contribution from the LukOil project in the Caspian Sea.

QoQ: Core profit more than doubled mainly due to higher contribution from the Kraken FPSO, partially offset by lower OMS revenue contribution and lower contribution from JV.

FPO segment. Olombendo FPSO has been granted final acceptance on 17th May 2018 while Kraken FPSO currently producing 40,000 barrels per day (bopd) and is expected to be granted final acceptance by 2Q18.

OMS segment. OSV vessel utilisation continued to be adversely affected by the challenging oil and gas market environment with utilisation rate of 38% for the group’s vessels in 1Q18 (vs 46% in 4Q17). Management expects OSV business to remain weak and does not expect a significant improvement in subsequent quarters of FY18.

Order book. The group’s firm order book stood at RM26.2bn with optional contract value of RM11.1bn as at end of 1Q18. The firm order book cover ratio is c.10.9x of FY17 revenue and provides a stable earnings base going forward.

Forecast. We raised our FY18-19 earnings forecast by 4.9% and 4.8% respectively after imputed lower operating expenses assumptions. We introduce our FY20 forecast of RM423.7m.

Upgrade to BUY, TP: RM0.90. Upgrade to BUY recommendation with higher SOP derived TP of RM0.90 (from RM0.79) post earnings forecast adjustment. Earnings are expected to be stronger this year with the final acceptance of Olombendo FPSO. Moreover, expectation of final acceptance of Kraken FPSO by 2Q18 will further boost the earnings power of the company.

Source: Hong Leong Investment Bank Research - 1 Jun 2018