• 2Q20 core net profit jumped 47% qoq; results were significantly above our and market estimates, making up 83%/75% of respective forecasts
• The surprise was mainly due to higher-than-expected contribution from the FPO segment and lower-than-expected finance cost
• Raise Our 2020-22 EPS by 38%-57% and TP to RM0.39. Upgrading to Buy

Results Above Expectation

2Q20 revenue grew 13% yoy to RM607m supported by a firm FPO segment (+18% yoy) owing to the good performances of FPSO Olombendo and Kraken, offsetting the 7% yoy decline in OMS revenue. 6M20 core net profit grew 57% yoy mainly attributed to the higher FPSO Kraken uptime and lower FPSO Olombendo repairs and maintenance costs incurred in 1Q20, offsetting the higher OMS losses and depreciation cost. FPSO Kraken has been operating at above 90% efficiency since 2H19, after having resolved performance issues in 1H19.

Kraken Continues to Do Better

Sequentially, FPO revenue increased by 13% on better FPSO Kraken uptime. Notwithstanding, its segmental operating profit was 5% lower qoq as a result of higher FPSO Olombendo operating costs this quarter, and lower repair and maintenance costs incurred in 1Q20. To our surprise, at the associate level, losses remained at RM4m, despite the absence of the deferred tax liability impact in 1Q20, which we gather was due to one-off cost incurred for a technical study needed for Sterling I recent contract extension.

Raising Our Earnings by 38-57%

With the strong results, we raise our 2020-22E EPS by 38-57% to factor in higher FPO segment margin, slightly offset by lower JV profit in 2020 to take into account the weaker 6M20 numbers.

Upgrade to BUY With Higher TP of RM0.39

We raise our SOTP-based target price to RM0.39 (from RM0.20), post earnings upgrade and adjusting for a lower WACC assumption. Kraken’s recent high operational uptime should alleviate investors’ concerns of any potential future earnings disappointment. This together with the recent FPO margins surprise, should see current valuation rerate closer to 6x 2021E PER (which represents a 33% discount to its historical PER valuations, pre the Kraken impairment). With Kraken stablizing, we believe a portion of the impairment provided for in 2018 should be written back. As such, we upgrade the stock to a BUY (from Sell) rating.

Risk to Our Call

Downside risks include weaker OSV fleet utilisation and termination of existing FPO contracts. Despite the stronger 6M20 earnings growth, operating cash flow has fallen by 43.7% yoy, which is short of the RM679m debt due by May 2021. This might need to be extended, subject to lenders approval.

Source: Affin Hwang Research - 1 Sept 2020