Deemed within expectations. 1H17 core net profit of RM191.5m arrived at 61%/68% of our/street’s full-year estimates. It is deemed within expectations as the one-off revenue recognised on previous work performed on Lukoil project upon formalisation of supplementary agreement potentially offsetting lower earnings contribution from Armada Kraken within the interim production agreement. However, the amount is unknown due to confidentiality. No dividend is declared as expected.

One-off gain boosted 2Q17 earnings. Sequentially, CNP surged by 46% to RM113.6m in tandem with 72% growth in top-line, thanks to one-off revenue recognised on previous work performed on Lukoil project upon formalisation of supplementary agreement, higher contribution from Armada Olombendo, Armada LNG Mediterrana, as well as better vessel utilisation of 52% vs 42% in 1Q17. However, this is partially offset by weaker 81% QoQ contribution from JV and associate income in the absence of one-off claim and conversion profit, which was recognised in 1Q17.

YoY, driven by 72% stronger revenue, earnings jumped 1.4x from RM47.3m in 2Q16, helped by the abovementioned one-off gain for Lukoil project and maiden earnings contribution from Armada LNG Mediterrana and Armada Olombendo masking weaker contribution from supplementary payments made for Kraken project and lower JV and associate earnings in the absence of conversion profit. Cumulatively, 1H17 core earnings also improved by 1.3x from RM84.3m in 1H16 similar to the reasons mentioned above.

Interim production agreement for Kraken. Post hitting first oil on 23 June 2017, ARMADA is trying to work towards full acceptance with its client, EnQuest. However, due to lower-than-expected operational efficiency, EnQuest has to lower its production guidance for 2017. Following that, while the commissioning of FPSO continues, EnQuest has entered an interim production agreement with ARMADA until the full acceptance is achieved (estimated by 4Q17), allowing ARMADA to recognise partial charter income depending on the number of bbls of oil processed. On the other hand, ARMADA is also aiming to hit full acceptance for Armada Olombendo by 4Q17.

Lower FY18E earnings. We made no changes to our FY17E earnings factoring in the one-off gain from Lukeoil assuming the previous work is carried out for approximately one year offsetting lower earnings contribution from Armada Kraken within the interim production agreement. Meanwhile, we lowered FY18E earnings by 4% factoring lower JV earnings contribution from Arrmada Sterling and Armada Sterling II.

Maintain OUTPERFORM. Despite minor earnings adjustment, we made no changes to our SoP-driven TP at RM0.90. We still maintain OUTPEROFRM call on ARMADA in view of strong earnings improvement of 34% in FY18E with full contribution from Kraken and Olombendo in the picture. Our TP of RM0.90/share implies 12.6x FY18E PER and 0.8x PBV, which 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 - 28 Aug 2017