Stronger FY19 core earnings came in slightly below our expectation, but in-line with market’s, driven by operational recovery in Armada Kraken FPSO. Moving forward, we expect continued operational uptime for Kraken to lead to a stronger FY20. Although the company’s high net-gearing remains a key underlying concern, we believe at current price levels offer trading opportunities. Maintain OUTPERFORM with lowered TP of RM0.42.

Below our expectation, but in-line with market’s. FY19 core net profit came in at RM281.8m (arrived after stripping-off non-core items i.e. impairments, unrealised forex etc, cumulatively amounting to RM223m), coming in below our expectation, making up only 93% of our forecast, due to poorer-than-expected FPO and OMS segment contributions. However, it was actually spot on market’s expectation. No dividends were announced, as expected.

Improvement of results helped by Kraken. FY19 core net profit jumped 25% YoY, thanks to the operational recovery of Armada Kraken FPSO, especially in 2HFY19. This was partially offset by: (i) lower contributions from Armada TGT 1 FPSO, following a step-down of charter rates after signing of the extension agreement in Aug 2018, and (ii) completion of LukOil project in the Caspian Sea in Dec 2018, dragging its OMS segment. For the individual quarter of 4QFY19, core net profit of RM52.5m showed a 9% improvement YoY, due to similar aforementioned reasons.

Sequentially however, core net profit declined 35% QoQ. The quarter was hit by an adjustment of charter hire revenue for Armada Kraken FPSO, due to the vessel’s lower availability in the preceding quarters, especially in 1HFY19. Meanwhile, its OMS segment was also dragged by lower vessel utilisation (54% vs. 58%).

The worst is behind. Armada Kraken FPSO managed to deliver an uptime of >90% in 2HFY19, recovering from operational hiccups faced in 1HFY19. Moving forward, sustained operational uptime for Armada Kraken FPSO should be able to contribute to positive earnings growth going into FY20. In fact, as guided by management, the continued satisfactory operations of Armada Kraken FPSO should result in the reclassification of RM1.3b project-related term loans into long term debt (from currently short-term debt) by end-1QFY20, suggesting stability in the project.

Maintain OUTPERFORM. While the company’s high net-gearing still remains a key underlying concern, we believe trading opportunity is emerging at current levels, backed by continued earnings recovery.

We lowered our TP to RM0.42 (from RM0.53) after lowering our valuations to 8x PER on FY20E EPS – in-line with -0.5SD from its 12- month mean valuations (from previously 10x PER in-line with mean), given the slight earnings disappointment coupled with current weak market sentiment. Post-results, minimal changes to our FY20E numbers, while we introduce new FY21E numbers.

Risks to our call include: (i) poorer-than-expected margins, and (ii) costs overrun, (iii) poorer-than-expected asset uptime and utilisation.

Source: Kenanga Research - 28 Feb 2020