Armada registered a 4Q21 core net profit of RM132.0m (-22% QoQ, -18% YoY), bringing FY21 core net profit to a record high of RM659.1m (+41% YoY). The results came in within expectations at 95% of our full-year forecast and 104% of consensus. We highlight the following balance sheet improvements: (i) Armada’s net debt position has declined significantly to RM6.1bn as at end-4Q21 (from RM7.4bn as at end-4Q20); and (ii) net gearing has declined for the seventh consecutive quarter to 1.5x as at end-4Q21 from a peak of 2.9x in 1Q20. We maintain our BUY rating with an unchanged 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.

Within expectations – record high annual profits. Armada registered 4Q21 core profit of RM132.0m (-22% QoQ, -18% YoY), bringing FY21 core profit to a record high of RM659.1m (+42% YoY) The result came in within expectations at 95% of our full year forecast and 104% of consensus.

QoQ. Core profit declined by 22% primarily due to higher operating costs, repair and maintenance costs for Armada Olombendo FPSO. Also, the group’s OSV division flipped into the red due to higher operating costs booked throughout the quarter.

YoY. Core profit dipped by 18% due to similar reasons stated above in QoQ.

YTD. Core profit was up by 42% to a record high of RM659.1m due to: (i) a 38% increase in profit contribution from its FPSO segment, mainly on the back of improvement in Kraken’s performance throughout the year; (ii) increased JV contribution; and (iii) a decline of 19% in interest expense in FY21.

Outlook. We expect Armada to register better profits in FY22 with Kraken back on track with both trains now up and running. We see vast improvement in its balance sheet, cash flows and operational efficiency with the following highlights: (i) FY21 net cash flows from operations has improved by 50% YoY; (ii) lower net debt of RM6.1bn as at end-4Q21 (from RM7.4bn as at end-4Q20); and (iii) net gearing has declined for the seventh consecutive quarter to 1.5x as at end-4Q21 from a peak of 2.9x in 1Q20. Refer to Figures 1 to 2 for more details. The remaining balance of Tranche 1 under the USD660m Term Loan was USD27m, 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 is looking to dispose 4 more of its remaining vessels in future as the group aims to exit the OSV business entirely.

Forecast. Unchanged.

Maintain BUY, unchanged TP of RM0.84. We maintain our BUY rating with an unchanged 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 even 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 - 28 Feb 2022