The improved 1Q19 results came in within our expectation, helped by an uptime recovery in Armada Kraken FPSO, after being plagued with operational issues for much of last year. Meanwhile, reclassification of several short-term debts to long-term has diverted immediate default risks for the time being, but balance sheet still remains highly saddled at 2.7x net-gearing, with significant cash raising efforts still necessary. Maintain UP, with TP of RM0.18.

Within our expectations. 1Q19 Core Net Profit of RM73.3m (after adjustments for non-core items from reported Net Profit of RM62.2m) came in within expectation at 23% of our full-year forecast. However, the earnings were slightly above consensus at 31%, possibly due to street’s overly conservative view on Armada Kraken FPSO. No dividends were announced, as expected.

Sequential recovery from Armada Kraken FPSO. Sequentially, Core Net Profit recovered 53% QoQ, mainly helped by higher contribution from Armada Kraken FPSO (to recap, the vessel was plagued with operational issues throughout most of last year, thus hindering contributions from the FPSO). However, this was partially offset by poorer offshore marine services (OMS) as the LukOil project in the Caspian Sea reached completion in Dec 2018. YoY, Core Net Profit jumped 174%, mainly helped by: (i) expansion in margins from depreciation savings (-20%) following massive impairments of RM2.5b recognised last year, on top of corporate costs savings, and (ii) lower effective tax rate due to recognition of deferred tax assets, namely in Karapan Armada Sterling III. However, the better results were achieved despite poorer performance from both its segments; (i) FPO segment dragged by lower contributions from Armada TGT FPSO after an extension agreement in Aug-2018, and (ii) poorer OMS segment due to LukOil project’s completion in Dec 2018.

Outlook ahead. Positive takeaway from this quarter’s results is the early signs of recovery from Armada Kraken FPSO, after having suffered numerous operational issues most of last year. In fact, certain news reports have suggested that Kraken should be on-stream and producing ahead of schedule moving into 2Q19. Meanwhile, the group had also managed to avert an immediate default risk via the securement of debt refinancing back in April 2019. Of the RM6.8b shortterm debt in its books as at end-1Q19, we believe RM4.2b is due for reclassification into long-term debt next quarter, consisting of: (i) unsecured term loans and revolving credit, amounting to RM2.7b, via said refinancing, and (ii) Sukuk, amounting to RM1.5b, after receiving waiver on the covenant breach from Sukuk holders. However, this still does not help mitigate the fact that its net-gearing remains at an alarmingly high level of 2.7x. We believe the company would still need to focus its efforts on raising substantial cash via (i) significant improvements in operational efficiencies, and (ii) monetisation of assets, before its debt problem can be fundamentally resolved over the longer-term. Additionally, the group has also still yet to disclose a finalised plan on how it will raise funding for its equity portion of the ONCG contract secured earlier this month.

Maintain UNDERPERFORM. Post-model update, we adjust slightly our TP to RM0.18 (from RM0.19 previously), pegged to 0.3x PBV at -2S.D. from its 5-year mean. While we acknowledged some operational and financial improvements over the past few months (i.e. Kraken’s recovery and refinancing of unsecured debt), we remain cautious on the group’s highly geared balance-sheet and lack of fund-raising visibility moving forward. Post-results, we made no changes to our FY19-20E numbers. Risks to our call include: (i) higher-than-expected margins, and (ii) sudden surge in OSV utilisation.

Source: Kenanga Research - 28 May 2019