Armada registered 3Q19 earnings of RM90.9m (41.6% QoQ, +20.6% YoY), lifting 9M19 net profit to RM228.5m (+27.7% YoY). This came above expectations due to (i) improved contributions from its FPO segment and (ii) higher-than expected JV & associates contribution, making up 91.5%/84.5%% of ours/consensus full-year forecasts. We increased our FY19-21 earnings by 10%- 12% after imputing higher earnings contribution from its JV FPSO assets. Maintain BUY with a higher SOP-driven TP of RM0.60/share (from RM0.44 previously) as we reduce the discount (by 20%) to our FPSO Kraken DCF value on signs of continuous improvements in production.

Above expectations. Armada registered 3Q19 earnings of RM90.9m (+41.6% QoQ, +20.6% YoY), lifting 9M19 net profit to RM228.5m (+27.7% YoY). This came above expectations due to (i) improved contributions from its FPO segment and (ii) higher than-expected JV & associates contribution, making up 91.5%/84.5%% of ours/consensus full-year forecasts. No dividend was declared, as expected.

QoQ: Core profit increased by 41.6% to RM64.2m after stripping off (i) PPE disposal gain of RM29.9m, (ii) JV disposal gain of RM36.1m and (iii) debt write back, FX losses and receivables impairment amounting to a net amount of RM3.5m. The stronger performance was largely attributed to stronger FPO segment (higher contribution from Kraken) and OMS segment (turned profitable at EBIT level QoQ on higher OSV utilisation).

YoY: Core profit surged by +20.6% from RM75.4m in 3Q18 thanks to stronger FPO segment (+29%; better Kraken contribution). This was partially cushioned by weaker OMS segment (turned to losses; absence of VOs from Lukoil project) despite stronger OSV utilisation at 51% (vs 3Q18’s 43%).

YTD: Core profit improved by +33% from RM178.9m in 9M19 largely attributable to stronger FPO segment (+33.1%; better Kraken contribution) and JVs (+10.4%). This was partially offset by weaker OMS segment due to completion of the Lukoil project despite stronger OSV utilisation.

Outlook. FPSO Kraken is achieving material improvement in production efficiency this year and is expected to continue to produce stable earnings. Meanwhile, 5 OSVs were sold, leaving its total fleet at 32 in 3Q19. Armada will continue to monetise its non-core assets; recall that it disposed FPSO Perdana in September for c.USD40m to CESL. We understand that they are looking for a buyer of FPSO Claire as well. As evident by the better OSV utilisation of 58% in 3Q19 (vs. 51% in 2Q19), we can expect the OSV fleet utilisation to increase amidst fleet disposal and marginal improvement in DCRs.

Forecast. We increased our FY19-21 earnings by 10%-12% after imputing higher earnings contribution from its JV FPSO assets. .

Maintain BUY, TP: RM0.60. Post earnings adjustment; we maintain our BUY rating on the stock with a higher SOP-driven TP of RM0.60/share (from RM0.44 previously) as we reduce the discount (by 20%) to our FPSO Kraken DCF value on signs of continuous improvements in production. Our target price of RM0.60 has an implied FY20 P/E of 7.0x (5-year mean) and FY19 P/B of 0.5x (which is slightly above -0.5SD of its 5-year mean). Downside risk to our call would be earnings disappointment arising from Kraken operations and dilutive cash calls.

Source: Hong Leong Investment Bank Research - 25 Nov 2019