The seemingly strong 9M17 results are deemed within expectations as we anticipate a weaker performance in 4Q17 due to seasonality. Meanwhile, we expect Armada Olombendo and Armada Kraken to secure full acceptance by 4Q17 and 1Q18, respectively. With no changes in our estimates, we reiterate OUTPERFORM on ARMADA with unchanged SoP-driven TP of RM0.900/share.

Deemed within expectations. 9M17 core net profit of RM256.1m arrived at 81%/82% of our/street’s full-year estimates. It is deemed within expectations as we expect weaker 4Q17 dragged by seasonally lower vessel utilisation. No dividend was declared as expected.

3Q17 earnings down QoQ. Sequentially, CNP decreased by 43% to RM64.6m after stripping off (i) RM73.7m gain on disposal of FPSO Armada Intrepid, (ii) RM7.9m allowance for doubtful debt, (iii) RM1.9m impairment of AFS financial assets, and (iv) RM5.2m unrealised forex loss. The weaker performance was largely attributable to the absence of one-off revenue from Lukoil project, which was recognised in 2Q17, and higher cost incurred for Armada Olombendo. This was cushioned by (i) additional contribution from FPSO Kraken and Perdana, and (ii) stronger JV earnings (+7.7x) underpinned by one-off income from Armada Sterling and maiden income from Karapan Armada Sterling III since July.

YoY, in tandem with 70% stronger revenue, earnings returned to the black from core losses of RM22.2m in 3Q16, thanks to higher contribution from Armada Olombendo, Armada LNG Mediterrana, and stronger JV contribution (+25%). This is despite lower OSV utilisation of 53% vs. 55% in 3Q17. Cumulatively, 9M17 core earnings also improved by 3.2x to RM256.1m from RM62.1m in 9M16 on similar reasons mentioned above.

Interim production agreement for Kraken likely to stay. Post hitting first oil on 23 June 2017, ARMADA is trying to work towards full acceptance with its client, EnQuest with an interim production agreement in place until final acceptance is granted. Given the higherthan-expected technical complexity, we believe ARMADA could possibly be getting its final acceptance earliest by 1Q18, allowing them to recognise full charter income. On the other hand, currently Armada Olembendo is charging 90% of its charter rate and the management is confident of achieving full acceptance for Armada Olombendo by 4Q17. Meanwhile, note that ARMADA has permitted the continuing flow of produced oil into the Armada Perdana FPSO cargo tanks and a one-off cargo offtake in 3Q17. A substantial portion of the proceeds from sale of the said cargo was used to settle the outstanding amounts owed by the client. Thus, we do not discount the possibility of further cargo offtake from the vessel going forward.

Keeping our FY17-18E earnings. We made no changes to our FY17- 18E earnings as we expect 4Q17 to be weaker QoQ premising on weaker vessel utilisation during the monsoon season.

Maintain OUTPERFORM. In view of strong earnings improvement of 34% in FY18 with full contribution from Kraken and Olombendo in the picture, we still maintain OUTPEROFRM call on ARMADA with unchanged SoP-driven TP at RM0.900. Our TP of RM0.900/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 - 24 Nov 2017