Although CNP deteriorated 35% YoY, the 9M18 results were still within expectations. The decline in earnings was due to poorer OMS segment and higher finance costs. Moving forward, we are concerned over its debt issues, with USD380m term loans due in 1Q19, coupled with possible risk of further impairments. Hence, we lower our SoP-TP to RM0.350, from RM0.550 previously. Nonetheless, it is still a MARKET PERFORM.

Within expectations. 9M18 core net profit of RM165.9m (arrived after stripping off impairments of RM1b coupled with other non-core items) is within our expectation, coming in at 76% of our full-year forecast. However, the results were below consensus at only 61%, which we believe was due to an underestimation of finance costs. No dividends were announced, as expected.

Results review. YoY, 9M18 core net profit slid 35%, dragged by: (i) poorer OMS segment (-53%) due to work completion on the LukOil project, (ii) higher finance costs (+26%) due to the cessation of capitalisation of borrowing costs following the final acceptance of Armada Kraken FPSO, offset by (iii) improved FPO segment (+25%) following the commencement of operations for Armada Olombendo FPSO and Armada Kraken FPSO in Feb-2017 and June-2018, respectively – i.e. contributions were recognised for a full period in 9M18.

Sequentially, 3Q18 core net profit more than doubled QoQ, driven by: (i) better FSO segment (+18%) as Armada Kraken FPSO reached final acceptance, offset by lower rates from Armada TGT FPSO going into an extension agreement, (ii) jump in JV’s contribution by more than double, which we gathered was due to a reversal of accruals in Karapan Armada Sterling III, masking (iii) lower OMS (-40%) due to lower contributions from Armada Installer as it completed its pipe laying operations in June.

Concerns over debt and impairment. Overall, we are concerned over ARMADA’s existing debt levels, with USD380m term loans due for repayment in 1Q19. Moreover, we also see further impairment risks going forward, both of which combined, may lead to severe hampering of its job winning ability (refer next page for a more elaborated discussion). No changes made to our FY18-19E numbers.

Maintain MARKET PERFORM. With growing concerns over its debt repayments, coupled with identified further impairment risks going forward, we find a de-rating of its valuations necessary. Hence, our SoP-TP is lowered to RM0.350, from RM0.550 previously, after tweaking (i) discounting rate for FSO segment to 10.3%, from 8.4%, reflecting increased risks, and (ii) lowered PBV valuation of its OMS segment to 0.4x, from 0.5x, reflecting impairment risks.

Overall, we find the de-rating to be fair and warranted, as our new SoP- TP implies a forward PBV of 0.4x (from previously 0.6x), in line with the ascribed valuations of another similarly debt-laden company SAPNRG.

Risks to our call include: (i) better-than-expected terms negotiated for a debt restructuring, and (ii) better-than-expected margins.

Source: Kenanga Research - 26 Nov 2018