At 74%/66% of HLIB and consensus’ estimates, Armada’s 9MFY18 core profit of RM179m (-30% YoY) came in within our expectations but disappointed consensus. Armada has repaid RM496.6m of the unsecured term loans and is eyeing to complete debt refinancing by 1Q19. Maintain HOLD with lower DCF derived TP of RM0.35 (from RM0.59) in view of heightened financial risk pending better clarity on its asset monetisation plan and resolution to debt restructuring.

Results within our expectation. 9M18 core profit came in at RM178.9m, accounting for 74% and 66% of HLIB and consensus’ estimates respectively. This is within our expectations but below consensus. No dividend was declared, as expected.

QoQ: Core profit surged 1.6x to RM75.4m despite revenue falling by 10% after stripping off (i) RM563.5m impairment made on OSVs and a FPSO classified as asset HFS, (ii) RM14.5m impairment on receivables from OSV clients and (iii) RM6.6m unrealised forex loss, etc. The significant improvement was largely attributed to (i) absence of additional cost provision made subsequent to formalisation of AA2 in 2Q18, (ii) stronger JV contribution (+1.4x; led by one-off reversal of capex accrual). This was partially offset by weaker OMS segment led by lower contribution from Armada Installer even though OSV utilisation improved to 43% from 38% in 2Q18.

YoY: Core profit also improved by 16% from RM64.6m in 2Q17 thanks to tax credit of RM0.8m vs tax expense of RM28m in 3Q17.

YTD: Cumulatively, 9M18 core profit plunged by 30% from RM256.1m in 9M17 dragged by (i) absence of one-off gains from Lukoil, (ii) higher finance cost (+26%) and (iii) weaker OSV utilisation masking stronger contribution from FPO segment led by Armada Olombendo and Armada Kraken.

Debt restructuring. Note that Armada has repaid RM496.6m of the unsecured term loans. Armada is in discussion with lenders to refinance the remaining balance of the unsecured term loans and is expected to be completed by 1Q19. Besides that, Armada is eyeing to raise more funds via the final drawdown of remaining project financing from existing facilities and also monetisation of assets.

Forecast. Unchanged as the Results Were Inline.

Maintain HOLD, TP: RM0.35. Despite the results coming inline, our SOP-derived TP is lowered to RM0.35 (from RM0.59) as we ascribe a 40% discount to SOP valuation. A discount is given in view of heightened financial risk pending its debt restructuring. Although share price is at an all-time low, we opine this would remain under pressure until Armada has better clarity on its asset monetisation plan and resolution to its debt restructuring.

Source: Hong Leong Investment Bank Research - 26 Nov 2018