Armada registered 3Q20 core earnings of RM96.7m (-18.5% QoQ, +6.3% YoY) bringing 9M20 core earnings to RM303.7m (+32.9% YoY). The result was above expectations, constituting 93% and 83% of our and consensus’ forecast due to stronger-than-expected contribution from FPSO Kraken despite scheduled maintenance activities. We upgrade our earnings forecast for FY20-22F by 19/15/14% to factor in the stronger performance from its FPSO segment. Maintain BUY with a higher target price of RM0.65 based on 10.0x (-1.5SD from Yinson’s 3 year mean P/E) FY21 EPS. Armada is our top pick for the O&G sector as its valuations are still undemanding at this juncture. Armada is currently trading at an FY20/21PE of 4.0/3.9x, with minimal solvency risk.

Above expectations. Armada registered a core profit of RM96.7m (-18.5% QoQ, +6.3% YoY) after adjusting for (i) impairments from non-current assets held for sale (RM16.1m) and (ii) write-back of amounts due from JV (RM11.0m) (iii) unrealised forex losses amounting to RM5.6m, bringing 9M20 core profit to RM303.7m (+32.9% YoY). 9M20 earnings accounted for 93% of ours and 83% of consensus’ FY20 forecasts, coming in above expectations due to stronger-than-expected performance for Kraken despite scheduled maintenance activities. 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 declined by 18.5% QoQ to RM96.7 (from RM118.6) particularly due to planned shutdowns for Kraken, TGT1 and weaker OMS earnings.

YoY: Core profit improved by 6.3% YoY to RM96.7m due to significantly better performance from Kraken despite planned shutdowns as FPSO revenue and operating profit rose by 3.7% and 27.1% YoY respectively. However, OMS segment performance was weaker during the quarter as operating losses stood at -RM37.9m (YoY: RM9.0m).

YTD: Core profit of RM303.7m (+32.9% 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 its 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 RM8.5bn in 2Q20 to RM7.9bn representing a c.RM0.6bn decline in its net debt position QoQ and a c.RM0.8bn declined in its YTD net debt position. Net gearing has also fallen from 2.8x in 2Q20 to 2.6x in 3Q20 and is expected to fall further in subsequent quarters while interest cover has remained steady at 3.0x in 3Q20. Its 9M20 operating cash flow stood at RM595m (+19.4% YoY), which validates our view that there should not be huge concerns with regards to the receipts from debtors. 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 RM656m required to pay off its short-term unsecured term loans due in May 2021. We believe that with its improving cash flow and financial position, the Company would be able to settle its debt repayments by the aforesaid due date. Armada also has an outstanding firm orderbook of RM17.2bn (FPSO: 95%, OMS: 5%) with an optional extension period order book of RM10.0bn (FPSO: 87%, OMS: 13%).

Forecast. We upgrade our earnings by 19/15/14% for FY20-22F to factor in stronger FPSO earnings from its FPSO segment.

Maintain BUY with higher TP of RM0.65. We maintain our BUY rating on the stock with a higher TP of RM0.65 based on 10.0x FY21f EPS (-1.5SD from Yinson’s 3 year historical mean P/E) in view of its stronger financial performance. Both Yinson and Armada are trading at similar net gearing levels (Yinson: 2.3x, Armada: 2.6x) while Bumi is currently trading at 4.0/3.9x FY20/21 EPS and Yinson is currently trading at 13.5/12.3x FY21-22f EPS (consensus estimates; FYE Jan). We believe that the valuation gap between Armada and Yinson should narrow as the former continues to record strong earnings and improve on its financial position.

Source: Hong Leong Investment Bank Research - 20 Nov 2020