Despite poor results with massive impairment made in FY16, we believe FY17 be a better year for ARMADA, fueled with new source of earnings. However, watch out for Kraken project as ARMADA is renegotiating a new backstop date. All in, we maintain MARKET PERFORM call on the stock with higher SoP-driven TP of RM0.73/share factoring lower discount rate for successful delivery of new projects and higher forex assumption.

Below expectations. ARMADA recorded cumulative core net loss of RM101.3m in FY16, falling below our and street?s net profit forecasts of RM65.0m and RM107.4m, respectively. The negative deviation is mainly due to weaker-than-expected margin for FPSO segment resulting from the stubbornly high fixed cost. No dividend was declared as expected.

Another loss-making quarter. Sequentially, ARMADA widened its core net loss to RM163.3m in 4Q16 from RM22.2m in 3Q16 after stripping off one-off items such as impairment on PPE RM1.1b (FPSO Armada Perdana, non-operating vessels, Armada Intrepid, Armada Gema, 35 OSVs and 3 subsea vessels), net allowance for doubtful debts of RM15.5m, fair value gain on re-measurement of a joint venture of RM27.3m, unrealised forex gain of RM3.0m and etc, in line with a 46% drop in revenue led by lower conversion revenue and recognition of supplementary payments for the Kraken FPSO project. It was further dragged by widening segmental losses from OMS business to RM75.4m from RM5.9m in 3Q16 as a result of lower activity from Lukoil project and weaker utilisation (49% vs 56% in 3Q16).

Dragging it to full-year loss. YoY, 4Q16 earnings also plunged from a core net profit of RM110.9m in tandem with 65% fall in top line, largely attributable to weaker FPSO contribution from Armada Claire, Armada Perkasa and Armada Perdana as well as lower conversion revenue from Eni and Kraken projects. Cumulatively, ARMADA slipped into core net losses of RM101.3m from RM264.4m in FY15 mainly due to the abovementioned reasons coupled with lower vessel utilisation but was cushioned by stronger JV contribution from Armada Sterling and Armada Sterling II.

Renegotiating backstop date for Kraken project. We are guided that ARMADA has completed hook-up job for Kraken FPSO but could potentially miss the backstop date of 1st April this year to hit first oil and resulting in the client having the contractual right to terminate the contract. The company is in the midst of renegotiating a new backdrop date and is targeting to hit first oil by 2Q17. While Armada LNG Mediterrana is already on hire and Armada Olombendo hitting first oil last month, Madura project experienced some delays from client, which could postpone its first oil date to 2H17. On the other hand, both OSV and T&I segments? earnings are expected to stay weak in the medium-term with continuous downside pressure on DCR given that the OSV oversupply might not be neutralised in near-term.

Slashed FY17E earnings by 9% to account for slower earnings contribution from Olembendo project in view of slower earnings recognition in the 1H17. FY18 earnings of RM357.9m (+29% YoY) was introduced assuming: (i) full earnings contribution from Olembendo, Kraken and Armada Sterling III, and (ii) average OSV utilisation of 55%

Retain MARKET PERFORM. Despite earnings adjustment, we have increased our SoP-driven TP to RM0.73 from RM0.65 factoring: (i) lower discount rate for Olembendo and Malta being successful on hire, and (ii) higher average MYR/USD assumption. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than- expected margins.

Source: Kenanga Research - 01 Mar 2017