Period

3Q15/9M15

Actual vs. Expectations

In 3Q15, ARMADA posted core net profit of RM51.1m, bringing its cumulative 9M15 core profit to RM198.1m. This came below our in-house/street’s expectations, accounting for only 68.0%/59.1% of the respective fullyear consensus.

The variation is largely attributable to lower-thanexpected contribution from OSV.

Dividends

No dividend was declared as expected.

Key Results Highlights

3Q15 core net profit plunged 52.5% YoY to RM51.1m from RM107.7m last year mainly due to weaker OSV and T&I segments which posted an operating loss of RM18.8m and RM30.4m in the quarter from an operating profit of RM28.4m and RM31.7m, respectively, in the corresponding period last year. However, we are guided that all the business segments are still in cashflow positive position requiring no subsidies from other business segments.

Sequentially, 2Q15 core net profit declined by 6.0% largely attributable to significant weaker T&I segment due to inter-phase slowdown in Lukoil projects with three pipelay barges seeing a sharp drop in utilisation. Meanwhile, its OSV segment managed to narrow its operating loss marginally to RM18.8m from a loss of RM22.6m due to the improved vessel utilisation by 1% to 54%. Furthermore, its FPSO segment recorded stronger contribution thanks to higher FPSO conversion activity coupled with improved EBIT margin achieved from projects executed.

9M15 cumulative core net profit weakened 27% YoY to RM198.1m from RM271.4m in the corresponding period last year. This was mainly due to its OSV business slipping into a loss of RM41.2m in the period under review as vessel utilisation worsened significantly amid industry downturn. T&I segment also dropped significantly due to weaker performance in the past six months as a result of reduced activity from the Lukoil project. However, the FPSO division partially offset the decline on stronger contribution from conversion revenue from the Kraken and Eni 1506 FPSO projects as well as the Armada LNG Mediterrana FGS project.

Outlook

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

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 cashflow for the group in the coming years.

Outlook

Further impairments on its OSV & T&I assets of similar quantum in 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.

Furthermore, we were also guided that the company is tendering new FPSO projects in Vietnam and Brazil, which will be finalised within the next 6 to 12 months. This could be a re-rating catalyst for ARMADA amid such challenging operating environment. However, we did not factor this into our forecast pending more guidance from the management.

Change to Forecasts

We have cut our FY15/16E earnings by 10.5/6.0% as we account for lower OSV utilisation rate to 55/60% from 63/67% previously.

Rating

Maintain OUTPERFORM

Valuation

Despite the earnings cut, we made no changes to our target price of RM1.17 based on SoP valuation due to our relatively conservative valuation in the T&I and OSV segments, ascribing only 0.4 PBV to both divisions.

Risks to Our Call

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

Source: Kenanga Research - 23 Nov 2015