Despite no surprises in FY17 results, we upgraded FY18E earnings by 12% on better cost control. This offers attractive growth of 46% in FY18 led by higher contribution from Olombendo and Kraken projects, which are on track for their final acceptance in the near term. All in, we maintain OP call on the stock with higher TP of RM1.10 from RM0.90 previously, factoring higher OMS valuations and lower net debt position post FY17 results update.

FY17 results came in line. FY17 core net profit of RM301.1m came within expectations at 96% of our/street’s full-year estimates. No dividend was declared as expected.

4Q17 earnings down QoQ. Sequentially, CNP decreased by 31% to RM44.9m after stripping off; (i) RM16.8m gain on vessel disposal, (ii) RM3.6m allowance for doubtful debt, (iii) RM0.7m impairment of AFS financial assets, (iv) RM4.1m FV gains on derivative financial instruments, and (v) RM2.3m unrealised forex gain. The weaker performance was largely attributable to weaker JV earnings (-70%) led by higher deferred tax expense and absence of one-off income from Armada Sterling masking better OMS segment (+1.7x; lower operating costs) despite weaker vessel utilisation (46% vs. 3Q17’s 53%).

FY17 returned to the black strongly. YoY, in tandem with 2.2x surge in revenue, earnings returned to the black from core loss of RM163.3m in 4Q16, thanks to stronger FPO segment (RM104.5m profit vs 4Q16’s RM165.6m losses) led by higher contribution from Armada Olombendo, Armada LNG Mediterrana and absence of supplementary payments for Kraken project as well as better OMS segment (RM11.8m profit vs. 4Q16’s RM75.4m losses) underpinned by higher Lukoil activities and better cost efficiency. This is despite lower OSV utilisation of 46% vs. 48% in 4Q17. Cumulatively, ARMADA also returned to the black in FY17 from CNL of RM101.3m on similar reasons mentioned above.

Kraken likely to hit full acceptance by 2Q18. As of 4Q17, RM2.1b of borrowings related to Kraken has been re-classified to current liabilities for missing the full acceptance date scheduled earlier on as the project lenders have the right to issue a cancellation notice for full loan repayment. That said, we understand that Armada Kraken is currently producing c.50k/bbl of oil and is likely to resolve the issue upon full acceptance by 2Q18. On the other hand, currently Armada Olombendo is charging 90% of its charter rate and on track for full acceptance by 1Q18. Meanwhile, the management is in talks with client to extend Armada TGT 1 which is expiring by August this year.

Upgrade FY18E earnings by 9% factoring; (i) lower operating cost as the company is undergoing further cost optimisation exercise and (ii) higher contribution from OMS segment. Meanwhile, FY19E NP of RM475.1m (+8.1%) is introduced assuming (i) full earnings contribution from Olombendo and Kraken as well as (ii) 26% improvement in OMS segment underpinned by higher average OSV utilisation of 60% from 55% in FY18.

Maintain OUTPERFORM. Post earnings upgrade, our SoP-driven TP is upped to RM1.10 (implying 14.7x FY18E PER and 1.1x PBV) from RM0.90 factoring: (i) higher OMS segment valuation to 0.5x PBV (from 0.4x previously) to reflect its improving outlook, and (ii) lower net debt position after FY17 results update. All in, we maintain OP on the stock for its 46% earnings growth in FY18E largely driven by higher contributions from Olombendo and Kraken projects, which could be achieving its final acceptance in the near term. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 27 Feb 2018