Armada posted a 2Q22 core net profit of RM217.9m (+16% QoQ, +4% YoY), bringing 1H22 core earnings to RM405.2m (+13% YoY). We deem the results to be within our expectations (57%) but above consensus (61%) as we believe 3Q22 might post weaker earnings performance as Armada Kraken is sla ted for maintenance in Sep 2022. We see vast improvement in its balance sheet with the following highlights: (i) lower net debt of RM5.66bn as at end-2Q22 (from RM5.74bn as at end-1Q22); and (ii) net gearing has declined for the We maintain our BUY rating with a TP of RM0.76/share – pegged to a P/E multiple of 6x on rolled-over FY23f earnings (from RM0.84/share 7x of FY22 previously), which is at a 40% discount to its peer Yinson’s one-year forward multiple of 10x. Armada is our top pick for the O&G sector.

Within ours but above consensus. Armada posted a 2Q22 core net profit of RM217.9m (+16% QoQ, +4% YoY), bringing 1H22 core earnings to RM405.2m (+13% YoY) – adjusted predominantly for: (i) RM30.5m net forex gains; and (ii) RM63.8m net impairment losses of trade receivables and accrued lease rental. We deem the results to be within our expectations (57%) but above consensus (61%) as we believe 3Q22 might post weaker earnings performance as Armada Kraken is slated for maintenance in Sep 2022.

QoQ. Core net profit was up 16% primarily due to: (i) progress of Subsea Construction work in the Caspian Sea and Pre-FEED revenue recognised in 2Q22; and (ii) 58% improvement in JV and associate contribution due to a reversal of tax liabilities of RM15.4m throughout the quarter. All in, we understand that there were no major operational hurdles throughout the quarter.

YoY. Core net profit was up by 4% YoY primarily due to: (i) lower depreciation cost; (ii) 16% reduction in interest expense; and (iii) 95% lower tax expense. Again, there were no major operational hurdles throughout the quarter.

Outlook. We see vast improvement in its balance sheet with the following highlights: (i) lower net debt of RM5.66bn as at end-2Q22 (from RM5.74bn as at end-1Q22); and (ii) net gearing has declined for the 9th consecutive quarter to 1.2x as at end-2Q22 from a peak of 2.9x in 1Q20. Refer to Figures #2-3 for more details. We believe that Armada’s debt management risk will continue to gradually improve over the coming quarters. Armada is looking to dispose 3 more of its remaining OSV vessels in future as the group aims to exit the OSV business entirely. Armada has mentioned that there are no plans to raise new equity in the near term. We also note that Armada Claire FPSO will be sold in 2022.

Forecast. Unchanged.

Maintain BUY, TP of RM0.76. We maintain our BUY rating with a TP of RM0.76/share – pegged to a P/E multiple of 6x on rolled-over FY23f earnings (from RM0.84/share 7x of FY22 previously), which is at a 40% discount to its peer Yinson’s one-year forward multiple of 10x. At about only 3.2x FY23f 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. The recent weakness in Armada’s share price accentuates an attractive bargain-hunting opportunity. Armada is our top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 29 Aug 2022