1Q19 core profit of RM73.3m is deemed within expectations, accounting for 31% of HLIB and consensus’ estimates as we expect further weakness from OMS segment. Meanwhile, the material improvement in Aramda Karaken’s production efficiency will assist the negotiation with project lenders to reclassify its debt into non-current liabilities. Armada continues to dispose its non-core assets to improve the cash flow. Without changing our earnings estimates, maintain BUY on the counter with unchanged TP of RM0.33 with a potential upside of RM0.05/share from recently secured ONGC’s Kakinada 98/2 job.

Results deemed within expectations. 1Q19 core profit of RM73.3m is deemed within expectations, accounting for 31% of HLIB and consensus’ estimates as we expect further weakness from OMS segment. No dividend was declared, as expected.

QoQ: Core profit improved by 49% to RM73.3m after stripping off (i) PPE disposal gain of RM1.8m, (ii) RM5.5m impairment on amount due from JV, (iii) RM3.1m unrealised forex loss and etc. The better performance was largely attributed to higher FPO segment (+71%; higher contribution from Kraken). This was partially offset by weaker OMS segment (tuned losses; absence of VOs from Lukoil project) amidst flattish OSV utilisation at 38%.

YoY: Core profit fell marginally by -2% from RM74.5m in 1Q18 no thanks to weaker FPO segment (-13%; lower rate from Armada TGT extension) and JVs (+1.0x). This was partially cushioned by narrowed losses from OMS segment as a result of lower depreciation and lower tax expenses (-50%).

Outlook. According to Enquest’s latest presentation, FPSO Kraken has achieved material improvement in production efficiency in March/April compared to early last year. We believe this will assist in negotiating with the project lenders on the RM1.8bn term loan related to Armada Kraken that is still classified in current liabilities due to not being able to achieve final acceptance by the scheduled date earlier on. Meanwhile, 4 OSVs were sold, leaving its total fleet at 39 in 1Q19. Armada will continue to monetise its non-core assets including the two idle FPSO (Claire and Perdana) to improve cash flows. The OMS segment is likely to stay weak in FY19 given delay in job award on Lukoil project to early next year in the Caspian Sea. As for the new awarded Indian JV secured FPSO contract for ONGC’s Kakinada 98/2 job, management is not considering cash calls at this juncture. This probably suggests that Armada might be seeking another project lender to fund the equity portion.

Forecast. We are keeping our FY19-20 earnings in view of continued weakness in OMS segment. FY21 earnings of RM269m (+8% YoY) is introduced.

Maintain BUY, TP: RM0.33. Based on our initial estimates, the ONGC’s Kakinada 98/2 contract would add RM0.05/share to our TP assuming firm and extension period, 6.1% WACC, capex of USD1bn and 80:20 debt equity funding structure. We are keeping our BUY rating on the stock with unchanged SOP-driven TP of RM0.33/share. Our target price of RM0.33 has implied FY19 P/E of 8.2x and FY19 P/B of 0.5x, which is slightly above -1SD of its 3-year mean. Downside risk to our call would be earnings disappointment arising from Kraken operations and significant highly dilutive cash calls.

Source: Hong Leong Investment Bank Research - 28 May 2019