Despite improvement in 2Q16 earnings, overall 1H16 results still came below expectations largely dragged by weaker-than-expected FPSO earnings from Armada Perkasa & Armada Perdana. Hence, we lower our FY16-17E earnings by 16-4% given that these two vessels are currently at cash-neutral status. Maintain MARKET PERFORM with lower SoP-driven TP of RM0.76/share post earnings adjustment.

Below expectations. 1H16 results fell below expectations with core net profit of RM84.3m, accounting for only 46%/39% of our/consensus FY16 estimates. Our core net profit estimated excluded one-off items such as impairment of RM593.3m on Armada Claire and Armada Condor, unrealised forex gain, and write-back on provisions. The negative deviation is mainly due to weaker-thanexpected contribution from Armada Perdana and Armada Perkasa. No dividend was declared as expected.

Earnings improved QoQ. 2Q16 core net profit strengthened by 28% QoQ to RM46.3m from RM37.0m in 1Q16 largely helped by tax credit of RM9.5m vs. tax charge of RM34.8m and stronger JV contribution from Armada Sterling and Armada Sterling II but was offset by weaker contribution from other FPSOs and OMS segment amidst an industry-wide slowdown evident by 6.5% fall in revenue. FPSO & FGS contribution (excluding JV contribution) plunged 43% to RM20.1m resulting from lower conversion revenue, absence of Armada Claire contribution and Amada Perkasa. On the other hand, OMS segment’s contribution also sank to a loss of RM15.2m from a profit of RM16.5m in 1Q16 due to weaker OSV charter rates and lower contribution from Armada Installer despite an improvement in vessel utilisation to 55% from 45% in 1Q16.

Cumulative 1H16 still down YoY. 2Q16 earnings also increased by 9% YoY from RM43.3m in 1Q16 largely attributable to stronger JV contribution from Armada Sterling and Armada Sterling II but was offset by lower contribution from Armada Claire, Armada Perkasa and Armada Perdana. Despite 2Q16 posting an improvement on both YoY and QoQ basis, cumulatively, 1H16 still registered a 17.7% drop in core earnings to RM84.3m from RM102.3m in 1H15 dragged by a 70% plunge in FPSO (excluding JVs) contribution and lower vessel utilisation.

Focusing on four new projects. We are guided that the four FPSO/FGS projects (Kraken, Olombendo, Madura and Malta) are on track for delivery in 2H16. We believe the full impact from these projects will be felt in FY17. Both OSV and T&I segments’ earnings are expected to stay weak in the medium-term in view of the weak oil prices which will cap oilfield exploration and development activities. Furthermore, charter rates might encounter further downside pressure given that the OSV oversupply might not be neutralised in near-term.

Slashed FY16-17E earnings by 16-4%. Further signs of weakness appeared as ARMADA only managed to recover cash costs from clients (Erin Energy and AMNI) on charter of Armada Perdana and Perkasa, respectively. Thus, we have cut our FY16-17E earnings by 16-4% after lowering contribution from these two vessels.

Retain MARKET PERFORM. Post-earnings adjustment, our SoP-driven target price is lowered slightly to RM0.76/share from RM0.77 previously. Given that we have excluded Armada Claire from our valuation, any potential compensation would be value-accretive to our target price. Meanwhile, ARMADA and YINSON are the two frontrunners for the Ca Rong Do FPSO project in Vietnam and it would be a catalyst should ARMADA manage to bag the contract. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-thanexpected margins.

Source: Kenanga Research - 29 Aug 2016