Strong 9MFY19 results met expectations, driven by operational recovery in FPSO Armada Kraken. The FPSO reached an uptime of >90% during the quarter, providing comfort on its operational certainty moving forward, after numerous operational hiccups previously. Stable operations could partially help reprieve debt obligations; although we feel more cash raising efforts could still be necessary. Upgraded to MARKET PERFORM, with TP of RM0.53.

9MFY19 within expectations. ARMADA posted 9MFY19 core net profit of RM217.3m (after stripping-off non-recurring items e.g. gains on disposals, unrealised forex, etc) – coming within expectations, at 71% of our and 77% of consensus full-year earnings estimates. No dividends were declared, as expected.

Stronger overall results, helped by Kraken recovery. Cumulative 9MFY19 results jumped 66% YoY, heavily driven by the recovery of FPSO Armada Kraken, offsetting weaker OMS segment due to the completion of the LukOil project in the Caspian Sea in Dec 2018. For the individual quarter of 3QFY19, similar reasons can be said for the better YoY performance by +6% (core net profit of RM80.1m). Sequentially, 3QFY19 improved 25%, helped by higher uptime in FPSO Armada Kraken, coupled with higher JV contributions arising from tax exemptions obtained for Armada Sterling and Armada Sterling II FPSOs. However, this was partially offset by higher operating costs as a result of discounts obtained from vendors for FPSO Armada Olombendo last quarter.

Is the worst behind? FPSO Armada Kraken recorded an uptime of >90% during the quarter. This provides earnings comfort, with the FPSO having showed gradual operational recovery over the past several quarters. While the alarmingly high net-gearing (2.6x as at end- 3QFY19, with total borrowings of RM10b) is still a concern nonetheless, sustainable operations could provide some reprieve in partially meeting cash flow obligations, although we reckon further cash raising efforts may be needed. Operations aside, we see further avenues to raise cash (aside from equity fund raising) could include (i) continued monetisation of assets, as the company seeking to dispose portions of its OSV fleet, with FPSO Armada Claire also up for sale or new jobs, and/or (ii) favourable decision from the court case against Woodside.

Upgraded to MARKET PERFORM. With higher visibility in its operational certainty, especially on FPSO Armada Kraken, we feel an upgrade to our call is due, with expected improvements in cash flows somewhat alleviating its high borrowings concern. Our TP is raised to RM0.53 (from RM0.20 previously), pegged to 10x PER on FY20E – in- line with the stock’s 5-year mean PER valuations (from previously 0.3x PBV at “floor” valuations). Nonetheless, we feel that the recent rally in share price over the past few weeks have well priced-in foreseeable positives. No changes were made to our FY19-20E post-results.

Risks to our call include: (i) higher-than-expected margins, and (ii) sudden surge in OSV utilisation, and (iii) significant improvement in cash flow generating capabilities.

Source: Kenanga Research - 25 Nov 2019