Armada registered 2Q20 core earnings of RM118.6m (+34% QoQ, +84.7% YoY) bringing 1H20 core earnings to RM207.1m (+50.6% YoY). The results was above expectations, constituting 70% and 72% of our and consensus’ forecast due to significantly stronger-than-expected contribution from FPSO Kraken. We upgrade our earnings forecast for FY20-22F by 12/10/11% to factor in the stronger performance from its FPSO segment. Maintain BUY with a higher target price of RM0.60 based on 10.3x (from 8.2x) FY21 EPS. Our core profit was derived from our adjustments on (i) gain on disposal from FPSO Perdana (RM10.2m) and (ii) unrealized foreign exchange loss (-RM19.8m). Armada is our top pick for the O&G sector as its valuations are still very undemanding at this juncture. Armada is currently trading at an FY20/21PE of <5x, with minimal solvency risk.

Above expectations. Armada registered a core profit of RM118.6m (+34% QoQ, +84.7% YoY) after adjusting for (i) gain on disposal from FPSO Perdana (RM10.2m) (ii) unrealized foreign exchange loss (-RM19.8m), bringing 1H20 core profit to RM207.1m (+50.6% YoY). 1H20 earnings accounted for 70% of ours and 72% of consensus’ FY20 forecasts, coming in significantly above expectations due to stronger-than-expected performance for Kraken. We believe that the FPSO segment will continue to perform well in subsequent quarters while its OMS segment is expected to remain weak. No dividends were declared during the quarter, none expected for the year.

QoQ. Core profit improved by 34% QoQ to RM118.6m (from RM88.5m) particularly due to higher revenue and operating profit of RM521.2m (+12.8% QoQ) and RM254.1m (+43.4% QoQ) from its FPSO segment due to higher contribution from Kraken, partially offset by weaker performance from its OMS segment. The OMS segment recorded a revenue and operating loss of RM85.6m (-5.5% QoQ) and - RM30.3m (QoQ -RM48.3m).

YoY: Core profit improved by 84.7% YoY to RM118.6m (from RM64.2m) due to significantly better performance from Kraken as FPSO revenue and operating profit rose by 17.5% and 22.7% YoY respectively. However, OMS segment performance was weaker during the quarter as revenue was down 7% YoY, bringing operating losses to -RM30.3m (YoY: RM11.4m).

YTD: Core profit of RM207.1m (+50.6% YoY) was mainly driven by its strong FPSO segment, partially offset by weaker OMS performance.

Outlook. We expect Armada’s consistently strong earnings to continue in the foreseeable future as Armada’s FPSO contract values are not linked to the fluctuations in oil prices while we expect its OMS segment to deteriorate due to the subdued outlook for OSVs. Its current net debt has declined from RM9.7bn in 1Q20 to RM9.4bn in 2Q20 after its net debt repayment of RM522.9m in 2Q20. Net gearing has also fallen from 2.9x in 1Q20 to 2.8x in 2Q20 and is expected to fall further in subsequent quarters while interest cover has improved from 2.8x in 1Q20 to 3.0x in 2Q20. We also expect sizable receivable receipts to happen in 3Q20 as a huge proportion of its receipts of receivables are due in 3Q20 and we expect to see a decent increase in operating cash flow in 2H20 as a result of this. The aforementioned factors are testaments towards the projected improvements on its financial position from a profit, solvency and cash flow stand point. We do not foresee Armada having any trouble raising the RM680m required to pay off its short-term unsecured term loans due in May 2021. Armada also has an outstanding firm orderbook of RM17.2bn (FPSO: 95%, OMS: 5%) with an optional extension period order book of RM10.1bn (FPSO: 87%, OMS: 13%).

Forecast. We upgrade our earnings by 12/10/11% for FY20-22F to factor in stronger FPSO earnings from Kraken, whilst adjusting our OMS earnings down to factor in the subdued outlook for the OSV segment.

Maintain BUY, TP: RM0.60. We maintain our BUY rating on the stock with a higher TP of RM0.60 based on 10.3x (from 8.2x) FY21f EPS (-1.5SD (from -1.75SD) from Yinson’s 3 year historical mean P/E) in view of its stronger financial performance. Both Yinson and Bumi Armada are trading at similar net gearing levels (Yinson: 2.5x, Armada: 2.8x) while Bumi is currently trading at <5x FY20/21 EPS and Yinson is currently trading at 18/17x FY21-22f EPS (consensus estimates; FYE Jan). We believe that the valuation gap between Armada and Yinson should narrow as Armada continues to record strong earnings.

Source: Hong Leong Investment Bank Research - 1 Sept 2020