The USD134m supplementary contract will further strengthen ARMADA’s T&I track record and client relationship with Lukoil. Overall, we expect the OMS segment to improve from RM80.1m losses in FY16 on the back of lower depreciation and marginal improvement in T&I activities. With no changes in our estimates, we maintain OUTPERFORM call on the stock with unchanged SoP-driven TP of RM0.90 in view of more meaningful QoQ improvement to be seen in 2H17 onwards with Kraken in the picture.

USD134m contract from Lukoil. Last Friday, ARMADA announced that its wholly-owned subsidiary, Bumi Armada Caspian LLC has signed a supplementary agreement with Lukoil-Nizhnevolzhskneft LLC (Lukoil) for additional Engineering, Procurement, Construction and Installation (EPCI) job involving subsea pipe laying and undertaking of post-trenching and back-filling works on sections of the Filanovsky field in the Russian sector of the Caspian Sea. The USD134m (c.RM576m) works have commenced since 2Q17 and are expected to be completed in 2H18.

Continuous work orders for subsea assets. This contract is positive to ARMADA, strengthening its T&I track record and the client relationship with Lukoil. Note that ARMADA has been working with Lukoil in the Caspian Sea since 2012. Besides, ARMADA’s three iceclass OSV are chartered to Lukoil since 2016 under a 10-year firm charter with extension options up to another 20 years. As for Armada Installer, this vessel has also been contracted to Petronas Turkmenistan till May 2018 on a different schedule. For the newly secured contract, ARMADA will utilise both the Armada Installer and Armada Constructor vessels for the installation of c. 20 km of pipelines in the Filanovsky field. Out of these subsea assets, Armada Installer and Armada Constructor will remain the main revenue contributors while Armada KPI is currently cold stocked. Despite so, management is eyeing to secure job for this vessel in the Indonesian market.

No changes to our earnings forecast. Overall, we expect the OMS segment to improve from operating losses of RM80.1m in FY16 largely backed lower depreciation post RM733m impairment charge in 4Q16. The new supplementary contract will increase T&I activities marginally, in our view, given that these assets have been working with Lukoil. Thus, we made no changes to our earnings forecasts pending announcement of the 2Q17 results end of this month with the expectation of slight improvement QoQ and stronger 2H17 with Kraken in the picture.

Maintain OUTPERFORM. After hitting first oil in January this year, ARMADA has been recognising partial charter income as revenue and will be able to recognise full charter rates upon full acceptance. Meanwhile, ARMADA continues to engage with EPNL in order to reach an amicable solution for the outstanding payments but has allowed the flow of produced oil into FPSO Perdana. Currently, the share price is trading at undemanding valuation of 9.5x FY18 PER and thus, we maintain OUTPERFORM call on the stock with an unchanged SoPdriven TP of RM0.90/share in view of better QoQ earnings improvement with Kraken in the picture. Our TP of RM0.90/share implies 12.6x FY18 PER and 0.8x FY18 PBV, is in line with the industry sector valuation. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 14 Aug 2017