Armada registered a 3Q21 core net profit of RM169m (-19% QoQ, +75.0% YoY), bringing 9M21 core net profit to RM527.1m (+74% YoY). The results came in above expectations at 85% of our full-year forecast and 89% of consensus. We revise our FY21-23f net profit forecasts upwards by 12%, 26% and 31% respectively to reflect higher earnings contribution from the group’s overall FPSO business. We maintain our BUY rating with a higher TP of RM0.84 based on 7x of FY22F earnings, which is in-line with its 5-year historical mean forward P/E. Armada is our top pick for the O&G sector.

Above expectations. Armada registered 3Q21 core profit of RM169m (-19% QoQ, +75% YoY), bringing 9M21 core profit to RM527m (+74% YoY) – adjusted for: (i) net impairments on PPE amounting to -RM110m, (ii) gain on disposal of PPE amounting to RM25m and (iii) reversal of deferred tax liabilities amounting to RM20m. The result came in above expectations at 85% of our full-year forecast and 89% of consensus. Key variance against our forecasts was due to: (i) better than expected 9M21 performance from its FPSO business; and (ii) lower operating costs from its OSV segment.

QoQ. Core profit declined by 19% primarily due to an unplanned shutdown of one of the two trains at Armada Kraken FPSO. 3Q21 was also hit by lower operating income and lower JV and associate contributions.

YoY. Core profit improved by 75% due to: (i) improved vessel availability for its Armada Kraken FPSO; (ii) higher contribution from Armada Olombendo FPSO; and (iii) lower interest expense.

YTD. Core profit improved by 74% due similar reasons stated in YoY.

Outlook. We expect Armada to register better profits in 4Q21 with Kraken back on track with both trains now up and running. We see vast improvements in its balance sheet, cash flows and operational efficiency with the following highlights: (i) 9M21 net cash flows from operations has improved by 76% YoY; (ii) lower net debt of RM6.5bn as at end-3Q21 (from RM7.9bn as at end-3Q20); and (iii) net gearing has declined for the 6th consecutive quarter to 1.7x as at end-3Q21 from a peak of 2.9x in 1Q20. Refer to Figures 1 to 3 for more details. The remaining balance of Tranche 1 under the US$660m Term Loan was US$87m, with a maturity in November 2022. The group has indicated that it does not foresee any major hurdles in meeting its repayment obligations for Tranche 1. Armada has disposed 4 vessels in 3Q21 and is looking to dispose 4 more vessels in future as the group aims to exit the OSV business entirely.

Forecast. We revise our FY21-23f net profit forecasts upwards by 12%, 26% and 31% respectively to reflect higher earnings contribution from the group’s overall FPSO business.

Maintain BUY – higher TP of RM0.84. We maintain our BUY rating with a higher TP of RM0.84 based on 7x of FY22f earnings, which is in-line with its 5-year historical mean forward P/E. At about only 4x FY22f earnings currently, we think that Armada is highly compelling given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile. We are convinced that Armada should see clearer skies ahead with its ongoing efforts to continue improving its balance sheet and cash flow management. Armada is our top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 22 Nov 2021