Armada registered 2Q21 core earnings of RM210m (+42.0% QoQ, +77.0% YoY). The result was above expectations, constituting 75% of our and consensus’ forecast due to better than expected performance from its FPSO segment and higher vessel availability. We upgrade our earnings forecast for FY21/22/23 by 29/11/11% to factor in better overall FPSO performance going forward. Maintain BUY with unchanged TP of RM0.80 based on 8.0x FY22 EPS (rolled forward from FY21). Armada is our top pick for the O&G sector as its valuations are still undemanding at this juncture despite the c.100% increase in its share price since our BUY call upgrade on 21 July 2020. Armada is currently trading at FY21/22PE of 4.2x/4.7x, with a significantly stronger balance sheet.

Above expectations. Armada registered 2Q21 core profit of RM210m (+42.0% QoQ, +77.0% YoY), bringing 1H21 core profit to RM358m (+72.8% YoY). The result was above expectations constituting 75% of our/consensus FY21 forecasts due better than expected performance from Kraken and lower maintenance work done for vessels during the quarter. 1H21 core earnings were derived from our removal of EI’s amounting to a net -RM55.2m mainly comprising of (i) net impairments on PPE amounting to - RM104m, (ii) gain on disposal of PPE amounting to RM19.1m and (iii) reversal of deferred tax liabilities amounting to RM16.7m.

Dividends. None Declared, as Expected.

QoQ. Core profit increased by 42.0% to RM210m due to (i) higher availability for most of its vessels, (ii) higher utilisation rates for its OMS segment as a result of additional sales of its OSV fleet, (iii) higher JV and associate contribution and (iv) better than expected performance from Kraken.

YoY. Core profit improved by 77.0% due to the same reasons mentioned above.

YTD. Core profit improved by 72.8% due to the substantial improvements in operational efficiency from its FPSO segment.

Outlook. We expect Armada’s consistently strong earnings to continue in the foreseeable future as 1H21 net OCF has improved by 187% YoY. Consequently, its current net debt has declined to RM6.9bn (from RM8.8bn in 2Q20) and net gearing has also fallen from 2.8x in 2Q20 to 1.9x in 2Q21, the first time it has been below 2.0x since 2Q18 and is expected to fall further in subsequent quarters. The higher oil prices of late would also ease its asset monetisation process for its OMS business to repay its debt. Armada has disposed 2 vessels in 2Q21 and is expected to dispose 6 more vessels in 2H21. Hence, we do not foresee Armada having any trouble meeting any of its current debt obligations. Armada’s 98/2 JV with SPOGPL is also expected to commence operations in FY22 despite impending delays due to Covid-19, which could boost its profits in the near future.

Forecast. We upgrade our earnings by 29/11/11% for FY21/22/23 to factor in the better than expected performance for its FPSO segment and further streamlining of its operations from the sale of its OSV fleet.

Maintain BUY with unchanged TP of RM0.80. We maintain our BUY rating on the stock with an unchanged TP of RM0.80 as we roll forward our valuations to FY22. Our TP is based on 8.0x FY22 EPS. 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 - 30 Aug 2021