Period

2Q15/1H15

Actual vs. Expectations

In 2Q15, ARMADA posted core net profit of RM71.6m, bringing its cumulative 1H15 core profit to RM164.3m, within our expectations at 46.3% of full-year forecast but below market’s expectation at only 29.2%.

Our core net profit excludes: (i) RM353.8m impairment for PPE & noncurrent assets held for sale (mainly OSV and T&I assets), (ii) RM20.5m impairment for non-core asset at JV, (iii) RM8.8m impairment, and (iv) RM2.7m impairment for a JV investment.

Dividends

No dividend was declared as expected.

Key Results Highlights

2Q15 core net profit weakened 27.2% YoY to RM71.6m from RM98.4m last year mainly due to weaker OSV segment which saw its top line lower by 17.7%, driven by lower vessel utilisation amid a weak OSV market. In 2Q15, the division posted a loss of RM22.6m against RM19m EBIT last year. Its T&I division also booked in a RM6.4m loss for the quarter compared to RM26.1m profit in 2Q14 due to the idling of some of its pipelaying barges.

Sequentially, 2Q15 core net profit declined by 22.6% on the back of: (i) lower OSV vessel utilisation at 53% compared to 70% in the preceding quarter amid a weak market and vessel cold-stacking, and (ii) significant weaker T&I business performance as activity in Lukoil projects slowed down with three pipelay barges seeing a sharp drop in utilisation. However, its FPSO’s profitability improved QoQ due to higher EBIT margin achieved from projects executed.

1H15 cumulative core net profit at RM164.3m was relatively unchanged compared to RM163.1m in the corresponding period last year. Its OSV business has turned a loss of RM22.3m in the period under review as vessel utilisation worsened significantly as oil prices remained persistently low. T&I was stronger YoY due to higher revenue from Armada Installer driven by higher activities in the Caspian Sea. Partially offsetting the decline, FPSO revenue and EBIT was stronger YoY as conversion activities in Eni1506 FPSO (Olembendo) contract increased and with higher conversion revenue from its Malta FGS project.

Outlook

We do not expect recovery in both OSV and T&I business segment’s earnings in the medium-term in view of the weak oil prices which will cap oilfield exploration and development activity.

Four of its FPSO projects (Kraken, Olombendo, Indonesia and Malta) in the pipeline are progressing well with conversion in the shipyard, looking poised to be delivered to its client as scheduled, and giving strong incremental free cashflow for the group in the coming years.

Further impairments on its OSV & T&I assets of similar quantum in this 2Q15 are unlikely given the conservative assumptions made by the management on its assets’ value in use in the current quarter.

While near-term earnings are expected to be unexciting, we look forward to its performance in 2017 as most of its upcoming FPSO projects commencement are in full swing.

Change to Forecasts

We have tweaked our FY15/16E earnings by 15.7/14.8% as we account for: (i) lower OSV utilisation rate to 63/67% from 80/83% previously, and (ii) lower T&I fleet utilisation at 38% for both FY15/16E from 70% previously.

Our FY17E earning is tweaked down slightly by 2.6% post housekeeping changes in our model.

Rating

Maintain OUTPERFORM

Valuation

TP is reduced to RM1.17 from RM1.55 previously as we have decided to value its OSV & T&I business segments using PBV from PER previously due to their loss-making nature. 0.4x PBV is ascribed to both divisions, which is lower than our target of 0.5x for other OSV players due to its higher exposure to riskier foreign OSV & T&I markets. Higher WACC of 6.13% from 5.44% is used for its FPSO business DCF as we increase its cost of debt by 50 bps in view of higher market risk.

Risks to Our Call

(i) FPSO project execution risk, and (ii) weaker-than-expected margins

Source: Kenanga Research - 28 Aug 2015