BAB reported higher revenue qoq due to the maiden contribution from FPSO Olombendo which started production in February, as well as Malta FSU. 1Q17 core net profit came in at RM66.9m, which accounted for 21% and 24% of our and the street’s estimates. The result is in line with our expectation, as we should see new earnings contribution coming in from the FPSO Kraken project in 2H17. We maintain BUY with a higher SOTP-based 12M target price of RM0.95 as we roll forward our base year to FY18E.

Armada Olombendo Began Maiden Contribution

BAB booked a core net profit of RM66.9m in 1Q17 after adjusting for various one-off items, namely the RM8.8m allowance for doubtful debts written back and RM27.5m of net forex losses. BAB’s revenue fell 6.2% yoy to RM404.2m due to a lower OSV vessel utilisation, as well as contribution from the LukOil project. The group continued to recognise a small supplementary payment for the delay in FPSO Kraken. The lower revenue was partly mitigated by the maiden contributions from FPSO Olombendo and Malta FSU. OMS segment reported a commendable operating profit (1Q16: -RM0.4m vs 1Q17: RM8m) due to lower opex and depreciation costs. Meanwhile, T&I activities in the Caspian Sea is expected to pick up in the upcoming quarters (peaking in 3Q17). BAB has recently completed the documentation for the sale of FPSO Perkasa although no value was disclosed. Management is also looking to sell Armada Condor.

Sequential Improvement

Sequentially, BAB’s core earnings rebounded from core losses of RM148.7m in 4Q16 on the back of higher revenue (+96.7% qoq) due to maiden contributions from FPSO Olombendo and Malta. EBITDA margin improved 24.1ppts while higher associate contributions also led to the improvement in earnings. Associates/JV swung back to profit at RM49.1m (from RM34.2m of losses in 4Q16) after incurring a management fee which was paid at the JV level to BAB in the last quarter. Net gearing level has increased from 1.79x in 4Q16 to 1.84x.

Lowered 2017-19E EPS by 3%-15%

Despite the satisfactory 1Q17 results, in our view, we are lowering our 2017E EPS by 7% as we take into account only 2 quarters of FPSO Kraken contribution following the pushback in the backstop date to 15-Jul- 17. Our 2018-19E EPS are lower by 3% and 15% post housekeeping adjustments as we fine-tune some of our earlier finance lease assumptions and margins.

Source: Affin Hwang Research - 1 Jun 2017