Armada registered 1Q20 core earnings of RM80.5m (+67.9% QoQ, +20.7% YoY). We deem these results to be within expectations as we continue to expect the stellar performance from its FPO segment to be marred by the OMS segment in the near term. We keep our earnings estimates as the results were largely inline. Maintain HOLD with a higher SOP-driven TP of RM0.24/share (from RM0.17) as we factor in a lower discount to Armada’s SOP assets on the back of a regularization in performance from this division, i.e. FPSO Kraken.

Within expectations. Armada registered revenue of RM552.6m (+12.4% YoY) and a reported LAT of RM224.0m after incurring an impairment of RM314.4m for its OMS segment (OSV & Sub-sea construction vessels) in view of the current situation of the O&G industry. Adjusting for this EI, Armada recorded core earnings of RM80.5m (+67.9% QoQ, +20.7% YoY), which accounts for 30% of ours and consensus FY20 forecasts. We deem these results to be within expectations as we continue to expect the stellar performance from its FPO segment to be marred by the OMS segment in the near term.

QoQ. Core profit improved 67.9% to RM80.5 m (from RM52.7m) after adjusting for an impairment of RM314.4m from its OMS segment to account for (i) cold stacked vessels having lower values due to the current environment and (ii) working vessels will see lower utilisation and DCR’s in the near term. The improved performance QoQ was largely attributed to improved performance from FPSO Kraken and lower operating costs from Armada Olombendo, despite recording a loss of -RM4.5m from its JV’s (from RM23.9m QoQ), due to a recognition of deferred tax liability of RM36m in 1Q20 arising from temporary difference in on finance lease receivables.

YoY: Core profit improved by 20.7% YoY (from RM73.3m in 1Q19) thanks to stronger revenue and earnings from the FPO segment (improved contributions from Kraken and lower operatings costs from Olombendo and Perdana), partially offset by weaker OMS segment (widened losses; absence of work from Lukoil project) and losses at the JV level (from profit of RM38.4m YoY) due to the same above mentioned factors.

Outlook. We understand that FPSO Kraken has achieved a normalized level of operating efficiency, which serves as the solid base moving forward. Due to the improvement in Krakens operations, in Feb, the project lenders have agreed to remove the risk of having to prepay the loan. Meanwhile, 2 OSVs were sold, leaving its total fleet at 30 in 1Q20. Armada will continue to monetise its non-core assets in FY20 to improve its balance sheet position. Despite OSV utilisation charting an improvement of 2ppts QoQ (56% vs. 54% in 4Q19), we can expect the OSV fleet utilisation and DCRs to remain under pressure in the near term as the sector navigates through its current conundrum. Armada has an outstanding orderbook of RM18bn (firm) + RM10.3bn (extension option).

Forecast. Unchanged as the results came within expectations. We introduce our FY22 numbers.

Maintain HOLD, TP: RM0.24. We maintain our HOLD rating on the stock and a higher SOP-driven TP of RM0.24/share (from RM0.17) as we lower the discount to our SOP on consistent operational performance from Armada’s FPSO assets. Our target price of RM0.24 has an implied FY20 P/E of 4.2x (below -1.0SD of its 5 years mean) and FY19 P/B of 0.4x (below -1.0SD of its 5-year mean). Downside risk to our call would be earnings disappointment arising from (i) Kraken’s operation (ii) the OMS segment and (iii) significant highly dilutive cash calls.

Source: Hong Leong Investment Bank Research - 1 Jun 2020