Armada posted a record-high quarter in 4Q22 with a core net profit of RM222.7m (+7% QoQ, +69% YoY), bringing FY22 core earnings to RM827.9m (+26% YoY). The results came in within our expectations (101%) but beat consensus (107%). We see a vast improvement in its balance sheet with the following highlights: (i) lower net debt of RM4.7bn as at end-4Q22 (from RM5.3bn as at end-3Q22); and (ii) net gearing has declined for the 11th consecutive quarter to 0.9x as at end- 4Q22 from a peak of 2.9x in 1Q20. We maintain our BUY rating with a relatively unchanged TP of RM0.87/share – pegged to a P/E multiple of 6x on revised FY23f earnings, 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 record-high quarter in 4Q22 with a core net profit of RM222.7m (+7% QoQ, +69% YoY), bringing FY22 core earnings to RM827.9m (+26% YoY) – adjusted predominantly for: (i) RM46.0m net forex gains; (ii) RM71.4m net impairment losses for trade receivables, amount due from JV and accrued lease rental; (iii) RM74.1m of downward revision of residual value of vessels and increase in useful life of an FPSO vessel; (iv) RM4.8m of insurance claims; and (v) RM13.4m management fees charged to associates. The results came in within our expectations (101%) but beat consensus (107%).

QoQ. Core net profit came in marginally better (+7% QoQ), mainly due to better contribution from Armada Olombendo FPSO. We understand that there were no major operational hurdles throughout the quarter.

YoY/YTD. Core net profit was up by 69% YoY and 27% YTD primarily due to: (i) significantly lower depreciation costs; (ii) major reduction in interest expense; (iii) lower tax expenses; (iv) improved revenue contribution from its FPSO business; and (vi) absence of a drag arising from the group’s OSV segment, which was classified under discontinued operations in FY22.

Outlook. We see a vast improvement in its balance sheet with the following highlights: (i) lower net debt of RM4.7bn as at end-4Q22 (from RM5.3bn as at end- 3Q22); and (ii) net gearing has declined for the 11th consecutive quarter to 0.9x as at end-4Q22 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 of 1 more of its remaining OSV vessels in the future as the group aims to exit the OSV business entirely.

Forecast. Relatively unchanged after minor tweaks.

Maintain BUY, TP of RM0.87. We maintain our BUY rating with a relatively unchanged TP of RM0.87 – pegged to a P/E multiple of 6x on FY23f earnings, which is at a 40% discount to its peer Yinson’s one-year forward multiple of 10x. At about only 4x FY23f earnings currently, we think that Armada is highly compelling given its foothold in the FPSO business which provides steady cash flows and recurring income, coupled with speedy enhancement in its debt profile. Armada is our top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 27 Feb 2023