1H19 core profit of RM137.5m beat expectations, accounting for 58% and 56% of HLIB and consensus’ estimates due to stronger than expected JV contribution. Despite the material improvement in Aramda Karaken’s production efficiency, management does not expect any impairment write back in the near term. Meanwhile, OSV fleet utilisation is expected to pick up gradually amidst marginal improvement in DCRs. Post earnings adjustment, maintain BUY on the counter with higher TP of RM0.34 with a potential upside of RM0.05/share from the newly secured ONGC’s Kakinada 98/2 job.

Results came above expectations. Armada registered 2Q19 earnings of RM64.2m (-13% QoQ, +1.2x YoY), lifting 1H19 net profit to RM137.5m (+33% YoY). This came above expectations due to higher-than-expected JV & associates contribution, making up 58-56% of both our and consensus full-year forecasts. No dividend was declared, as expected.

QoQ: Core profit decreased by 13% to RM64.2m after stripping off (i) PPE disposal gain of RM0.3m, (ii) RM2.7m unrealised forex gain and (iii) RM11.3m FV gain through P&L on derivative financial instruments. The weaker performance was largely attributed to higher tax expense (+1.7x) masking stronger FPO segment (+12%; higher contribution from Kraken & Olombendo) and OMS segment (narrowed losses; higher OSV utilisation).

YoY: Core profit surged by 1.2x from RM29.0m in 2Q18 thanks to stronger FPO segment (+1.7x; better Kraken contribution) and JVs (+10%). This was partially cushioned by weaker OMS segment (tuned losses; absence of VOs from Lukoil project) despite stronger OSV utilisation at 51% (vs 2Q18’s 38%).

YTD: Core profit improved by 33% from RM103.5m in 1H18 largely attributable to stronger FPO segment (+35%; better Kraken and Olombendo contribution) and JVs (+48%). This was partially offset by weaker OMS segment without VOs from Lukoil project despite stronger OSV utilisation.

Outlook. Despite FPSO Kraken achieving material improvement in production efficiency this year and is expected to produce stable earnings, management does not expect any impairment write back in the near term. We believe this will assist in negotiating with the project lenders on the RM1.6bn 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, 2 OSVs were sold, leaving its total fleet at 37 in 2Q19. Armada will continue to monetise its non-core assets including the two idle FPSO (Claire and Perdana) to improve cash flows. As evident by the better OSV utilisation of 51% in 2Q19, management is expecting the OSV fleet utilisation to pick up gradually amidst marginal improvement in DCRs. 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.

Forecast. We increased our FY19-21 earnings by 5% after imputing higher earnings contribution from its JV FPSO assets. .

Maintain BUY, TP: RM0.34. Post earnings adjustment, we are keeping our BUY rating on the stock with higher SOP-driven TP of RM0.34/share (from RM0.33 previously). Our target price of RM0.34 has implied FY19 P/E of 8.0x and FY19 P/B of 0.6x, 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 - 3 Sept 2019