1H19 were mixed against expectations as operational recovery for Armada Kraken FPSO help lifted earnings. Moving forward, continued uptime from Armada Kraken FPSO could provide a more stable earnings base going into 2H19, but more vigorous cash raising efforts are still needed in the next 2 years (net-gearing of 2.7x) for the company to stay afloat. Maintain UP, as we remain cautious over its high borrowing levels. However, TP is raised to RM0.200, as we roll-forward our valuation base year to FY20E.

1H19 results mixed against expectations. 1H19 core net profit of RM137.2m (arrived after adjustments for non-core items) came in slightly below our expectations at 44% of our full-year earnings forecasts, due to weaker-than-expected offshore marine services (OMS) segment. However, against consensus, 1H19 results came in slightly above expectations at 56%, possibly due to stronger-thanexpected floating production and operations (FPO) segment, especially for Armada Kraken FPSO. No dividends were announced, as expected.

Stronger YoY, but slight blip sequentially. Cumulatively YTD, 1H19 more than doubled YoY, thanks to better FPO segment given higher contributions from Armada Kraken FPSO and Armada Olombendo FPSO. However, this was partially offset by weaker OMS segment, due to the completion of the LukOil project in the Capsian Sea in Dec-2018. Sequentially, 2Q19 was 13% weaker QoQ, dragged by higher tax expenses recognised (more than doubled). Excluding that, core PBT was actually better by 9% QoQ, driven by better performances from both its core segments, (i) FPO – higher contributions from Armada Kraken FPSO and Armada Olombendo FPSO, and (ii) OMS – improved vessel utilisation of 51% versus 39% last quarter.

Outlook ahead. Positive takeaway from the quarter is Armada Kraken FPSO continues to operate as per usual for a second consecutive quarter after suffering from numerous operation problems last year. We believe this should lead to a more stabilised earnings base moving into 2H19. Meanwhile, the group had also managed to avert immediate default risks after successfully managing to refinance some of its debt (refer to our report dated 25 April 2019). However, its net-gearing still remains alarmingly high at 2.7x (total borrowings of RM9.9b, of which 26% is still classified as short-term debts), and as such, we feel that the company would still need more vigorous efforts in cash raising over the next 2 years in order to stay afloat.

Maintain UNDERPERFORM. Post-results, we trimmed our FY19/20E earnings by 3%, after lowering our OMS contribution assumptions. However, our TP is raised to RM0.20 (from RM0.18 previously), pegged to an unchanged valuations of 0.3x PBV at -2SD from its 5-year mean, as we roll-forward our valuation base year to FY20E. Overall, we continue to remain cautious over the group’s highly geared balancesheet, while its recent run-up in share price could have also more than priced-in short-term positives.

Risks to our call include: (i) higher-than-expected margins, and (ii) sudden surge in OSV utilisation, (iii) significant improvement in cash flow generating capabilities.

Source: Kenanga Research - 3 Sept 2019