Armada registered 4Q19 core earnings of RM52.7m (-42% QoQ, +7.3% YoY), lifting FY19 net profit to RM281.2m (+23.3% YoY). This came within expectations due to improved contributions from its FPO segment offset by weaker OMS and JV contributions, making up 102%/100% of ours/consensus full-year forecasts. We keep our earnings estimates as the results were largely inline. Maintain BUY and SOP-driven TP of RM0.60/share.

Within expectations. Armada registered 4Q19 core earnings of RM52.7m (-42% QoQ, +7.3% YoY), lifting FY19 net profit to RM281.2m (+23.3% YoY). At 102%/100% of ours and consensus estimates, these results came in within expectations.

QoQ. Core profit dropped 42% to RM52.7.1m (from RM90.9m) after stripping off (i) non-cash charge of RM233.6m of accrued lease rentals relating to the Woodside case, (ii) RM43.7m impairment relating to vessels in the Caspian and (iii) RM16.6m unrealised forex loss. The poorer performance was largely attributed to weaker contributions from JV’s (-56.3% QoQ) as there were a few one offs, such as tax adjustments, vagaries of performance adjustment etc.

YoY: Core profit improved by 7.3% from RM49.1m in 4Q18 thanks to stronger FPO segment (+17.8%; better Kraken contribution). This was partially offset by weaker OMS segment (turned to losses; absence of VOs from Lukoil project) and JV contributions (-56% YoY) due to the same above mentioned factors.

YTD: Revenue declined 14.4% mainly arising from the OMS segment (due to the completion of the Lukoil project), offset by an increase in revenues from the FPO business (Kraken) adjusted for compensation payable to chartere rs of Kraken as per the amended agreement no.2. Core profit improved by +23% from RM228.1m in FY18 largely attributable to stronger FPO segment (+ 30.0%; better Kraken contribution) partially offset by weaker OMS segment due to completion of the Lukoil project despite stronger OSV utilisation (51% vs. 39%) YoY.

Outlook. We understand that FPSO Kraken has achieved >90% operating efficiency as at 4Q19 which serves as the base moving forward. Due to the improvement in Krakens operations, in February the project lenders have agreed to remove the risk of having to prepay the loan. Meanwhile, no OSVs were sold, leaving its total fleet at 32 in 4Q19. Armada will continue to monetise its non-core assets FY20 to improve its balance sheet position. As evident by the better OSV utilisation of 51% in FY19 (vs. 41% in FY18), we can expect the OSV fleet utilisation to increase amidst fleet disposal and marginal improvement in DCRs.

Forecast. Unchanged as the results came within expectations. .

Maintain BUY, TP: RM0.60. We maintain our BUY rating on the stock and our SOP driven TP of RM0.60/share. Our target price of RM0.60 has an implied FY20 P/E of 12.0x (+0.5SD above 5 year mean). Downside risk to our call would be earnings disappointment arising from Kraken operations and significant highly dilutive cash calls.

Source: Hong Leong Investment Bank Research - 28 Feb 2020