Armada registered 4Q20 core earnings of RM162m (+67.2% QoQ, +206.6% YoY) bringing FY20’s sum to RM465m (+65.5% YoY). The result was above expectations, constituting 120% and 119% of our and consensus’ forecast due to stronger-than-expected contribution from its FPSO business, lower administrative cost and higher JV contributions. We upgrade our earnings forecast for FY21/22 by 11/11% to factor in the aforementioned instances. Maintain BUY with a higher TP of RM0.75 based on 10.0x (unchanged) FY21 EPS. Armada is our top pick for the O&G sector as its valuations are still undemanding at this juncture despite the c.80% increase in its share price since our BUY call upgrade on 21 July 2020. Armada is currently trading at an FY21/22PE of 5.3/5.3x, with a significantly stronger balance sheet due to its strong cash flows.

Above expectations. Armada registered 4Q20 core profit of RM162m (-18.5% QoQ, +6.3% YoY), bringing FY20’s sum to RM465m (+65.5% YoY). FY20 earnings accounted for 120% of ours and 119% of consensus’ forecast. This is above expectations due to stronger-than-expected performance from its FPSO segments, JV contribution and lower administrative cost. FY20 core earnings were derived from our adjustments on EI’s amounting to RM351m mainly comprising of impairments amounting to RM357m.

Dividends. None Declared, as Expected.

QoQ. Core profit increased by 67.2% to RM162m particularly due lower administrative cost and higher JV income from the absence of technical phasing charges that were incurred in 9M20 for its D1 vessel.

YoY: Core profit improved by 206.6% from the reasons mentioned above and significantly better YoY FPSO performance from Kraken.

YTD: Core profit of RM465m (+65.5% YoY) was mainly driven by its strong FPSO segment, lower administrative expenses, lower interest cost.

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. FY20 operating cash flow has also improved to RM903m (+23.0% YoY). Consequently, its current net debt has declined from by almost RM1bn to RM7.4bn (from RM8.4bn), net gearing has also fallen from 2.9x in 1Q20 (post RM314m impairments) to 2.4x in 4Q20 and is expected to fall further in subsequent quarters while interest cover has improved to 3.1x in 4Q20 (from 1.8x in 4Q19). The aforementioned factors are testaments towards the projected improvements on its financial position from a profit, solvency and cash flow stand point. The higher oil prices of late would also ease its asset monetisation process for its OMS business to repay its debt. Hence, we do not foresee Armada having any trouble repaying its tranche 1 debt of RM1.05bn, which was refinanced to a maturity date of 23 Nov 2022.

Forecast. We upgrade our earnings by 11/11% for FY21/22 to factor in lower interest, administrative cost and higher FPSO earnings.

Maintain BUY with higher TP of RM0.75. We maintain our BUY rating on the stock with a higher TP of RM0.75 based on an unchanged 10.0x FY21f EPS (-1.5SD from Yinson’s 3 year historical mean P/E) in view of its stronger financial performance. We believe that the strong financial performance from Armada is expected to continue with its balance sheet getting healthier by the day. Armada is our Top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 8 Mar 2021