1Q18 core profit fell 4% YoY to RM74.5m but deemed within expectations on expected stronger quarters ahead helped by: (i) pick-up in OMS segment, and (ii) higher earnings contribution from Kraken (on track for full acceptance by end June) and Olombendo (full acceptance granted in 17 May). All in, we maintain OP call on ARMADA with unchanged TP of RM1.10.

1Q18 results deemed in line. 1Q18 core net profit of RM74.5m is deemed within expectations at 17%/16% of our/street’s full-year estimates as we expect stronger quarters ahead helped by: (i) pick-up in OMS segment, and (ii) higher earnings contribution from Kraken and Olombendo. No dividend was declared as expected.

1Q18 core earnings up QoQ on stronger FPSO segment. Sequentially, CNP surged by 66% to RM74.5m after stripping off; (i) RM14.7m gain on disposal of two OSVs, (ii) RM38.8m impairment losses for trade/other receivables, (iii) RM6.2m FV gains on derivative financial instruments, and (iv) RM0.7m unrealised forex gain. The stronger performance was largely attributable to stronger FPSO segment (+1.0x; higher contribution from Armada Kraken) masking weaker JV earnings (-23%; higher finance cost for Armada Sterling III) and poorer OMS segment (RM28.6m losses vs 4Q17’s RM11.8m profit; lower vessel utilisation at 38% vs 4Q17’s 46%).

…but down YoY dragged by weaker JV and OMS. Despite revenue surging 49% led by higher revenue recognition from both Armada Kraken and Olombendo, 1Q18 core earnings dropped 4% from RM77.9m in 1Q17 due to: (i) higher finance cost (+93% YoY), (ii) weaker OMS segment (RM28.6m losses vs 1Q17’s RM8.0m profit; lower vessel utilisation at 38% vs 1Q17’s 42%), and (iii) lower JV earnings (-62%; absence of one-off variation orders from Sterling I).

Kraken likely to hit full acceptance by end June. Despite experiencing maintenance shutdown in March, we understand that Armada Kraken is on track for its full acceptance by end June with average gross production from Jan-Apr 2018 at 36k bbl/day excluding the maintenance shutdown period. Note that the company is recognising 60-70% of its charter income in Jan-Feb 2018 under operating lease accounting model and will be switching to finance lease once full acceptance is granted. On the other hand, Armada Olombendo has received full acceptance from the client, Eni Angola on 17 May 2018 and has commenced its 12-year firm charter period since then. Meanwhile, the management is in talks with client to extend Armada TGT 1 which is expiring by August this year.

Maintaining our FY18-19E earnings. Despite 1Q18 earnings only accounting for 17% of our full-year estimates, we are maintaining our FY18-19 estimates in view of stronger quarters ahead helped by; (i) pick up in OMS segment, and (ii) higher earnings contribution from Kraken and Olombendo. No dividend was declared as expected.

Reiterate OUTPERFORM. All in, we maintain OP on the stock with unchanged SoP-driven TP of RM1.10 for its 46% earnings growth in FY18E largely driven by higher contributions from Olombendo and Kraken projects. Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 1 Jun 2018