ARMADA’s 9M16 fell below expectations with an unexpected loss of RM22.2m, dragged by stubborn fixed cost from non-performing vessels. Following the poor results and in view of possible delay in new projects, we lowered our FY16-17E earnings by 57-24%. Maintain MARKET PERFORM with lower SoP-driven TP of RM0.62/share post earnings adjustment and removal of valuation of Armada Perkasa and Armada Perdana.

Below expectations. 9M16 results fell below expectations with core net profit of RM62.1m, accounting for only 41%/36% of our/consensus FY16 estimates with an unexpected core net loss of RM22.2m in 3Q16. The negative deviation is mainly due to weaker-than-expected margin for FPSO segment resulting from the stubborn fixed cost. No dividend was declared as expected.

Unexpected loss-making quarter. Sequentially, ARMADA swung into a core net loss of RM22.2m in 3Q16 from RM47.3m core net profit in 2Q16 after stripping off one-off items such as net allowance for doubtful debts of RM75.9m, gain on disposal of PPE and unrealised forex gain of RM5.9m, in line with a 6% drop in revenue led by lower conversion revenue from Eni 1506 FPSO project. It was further dragged by higher finance cost as well as weaker JV and associate resulting from lower contribution from Armada Sterling II and conversion revenue from Madura project but partially offset by higher revenue from LukOil Project in the Caspian Sea and Armada Installer. Meanwhile, OSV vessel utilisation remained flat at 55% in 3Q16.

Poorer YoY performance. YoY, 3Q16 earnings also plunged from a core net profit of RM51.1m in tandem with 33% fall in top line, largely attributable to weaker FPSO contribution from Armada Claire, Armada Perkasa and Armada Perdana. Cumulatively, core net profit tanked to RM62.1m in 9M16 from RM153.4m in 9M15 mainly due to the abovementioned reasons but was cushioned by stronger JV contribution from Armada Sterling and Armada Sterling II.

Prioritising four new projects. We are guided that the Malta project is likely to contribute by end of the year while Kraken and Olembendo projects are slated to hit first oil in 1Q17. Madura project experienced some delays and earnings contribution could only kick in June next year. 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 57-27%. In view of possible delay in new projects, we have cut our FY16-17E earnings by 57-24% after: (i) factoring higher operating losses for Armada Perkasa and Perdana, (ii) delaying earnings contribution of Kraken, Olembendo for a quarter, and (iii) delaying earnings contribution from Madura for two quarters.

Retain MARKET PERFORM. Post-earnings adjustment, our SoPdriven target price is lowered to RM0.62/share from RM0.76/share as we decided to remove Armada Perkasa and Perdana’s valuations from our SoP valuation due to prolonged weakness in these two vessels. However, note that we have excluded Armada Claire from our valuation; any potential compensation would be value-accretive to our target price. Meanwhile, ARMADA is currently aiming for five FPSO projects in Vietnam, India, Nigeria, Ghana and Brazil. Any contract win would be a re-rating catalyst. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 24 Nov 2016