Armada registered 1Q21 core earnings of RM148m (-8.5% QoQ, +67.1% YoY). The result was above expectations, constituting 34% and 35% of our and consensus’ forecast due to lower-than-expected operating cost for FPSO Olombendo. We upgrade our earnings forecast for FY21/22 by 9%/15% to factor in better overall FPSO performance going forward. Maintain BUY with a higher TP of RM0.80 (from 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.105% increase in its share price since our BUY call upgrade on 21 July 2020. Armada is currently trading at an FY21/22PE of 5.5x/5.3x, with a significantly stronger balance sheet due to its strong cash flows and growth opportunities from oncoming projects.

Above expectations. Armada registered 1Q21 core profit of RM148m (-8.5% QoQ, +67.1% YoY). The result was above expectations constituting 34%/35% of our/consensus FY21 forecasts due to lower-than-expected operating cost from Olombendo. 1Q21 core earnings were derived from our adjustments on EI’s amounting to RM14.9m mainly comprising of (i) net impairments write-backs amounting to - RM5.7m and (ii) gain on disposal of PPE amounting to -RM7.0m.

Dividends. None Declared, as Expected.

QoQ. Core profit decreased by -8.5% to RM148m due to (i) lower vessel availability for Kraken, (ii) lower utilisation rates for its OMS segment as a result of the monsoon season and (iii) lower JV contribution from the extension cost of D1’s useful life.

YoY: Core profit improved by 67.1% due to significantly better performance from its FPSO segment, mitigated by weaker OSV performance.

Outlook. We expect Armada’s consistently strong earnings to continue in the foreseeable future as 1Q21 OCF before working capital has remain robust at RM328m (+3.2% YoY). Consequently, its current net debt has declined by about RM1.6bn to RM7.2bn (from RM8.7bn in 1Q20), net gearing has also fallen from 2.9x in 1Q20 to 2.1x in 1Q21 and is expected to fall further in subsequent quarters while interest cover has improved to 4.0x in 1Q21 (from 2.8x in 1Q20). 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. Armada’s 98/2 JV with SPOGPL is also expected to commence operations in FY22, which could boost its profits in the near future. We view that Armada is still in its early stages of commercial discussions on the FSRU JV project with the Port of Mumbai (MbPT) and the terms are yet to be ironed out. Nevertheless, we are positive on the prospects of the FSRU project with MbPT as we opine that there will be a huge market for gas in India in the future as most of India’s power is currently generated by coal.

Forecast. We upgrade our earnings by 9%/15% for FY21/22 to factor in the better than expected performance for its FPSO segment.

Maintain BUY with higher TP of RM0.80. We maintain our BUY rating on the stock with a higher TP of RM0.80 (from RM0.75) based on an unchanged 10.0x FY21 EPS 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. We also believe that oncoming projects like 98/2 and the FSRU JV with MbPT will be able to provide further earnings growth to the Company. Armada is our top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 27 May 2021