ARMADA continued to display strong earnings recovery trend, led by increased uptime in Armada Kraken FPSO. Overall, we like ARMADA given its earnings resiliency in the FPSO business, especially against the current oil down cycle. However, we are not entirely comfortable with the company’s current borrowings level. Maintain “Trading OUTPERFORM”, with TP of RM0.30.

Above expectations. 1HFY20 core net profit of RM220m (arrived after excluding impairments, unrealised forex, and other non-core items) exceeded expectations, coming in at 71%/77% of our/consensus full year earnings forecasts, due to stronger-than-expected floating, production, and operations (FPO) segment contribution thanks to improved vessel availability in Armada Kraken FPSO. No dividends were announced, as expected.

Earnings continue improving. 1HFY20 core earnings improved 60% YoY, mainly due to stronger FPO segment from higher vessel availability for Armada Kraken FPSO. QoQ, 2QFY20 also saw earnings jumping 45%, similarly thanks to increased Armada Kraken FPSO uptime.

Earnings resilient, but wary of debt repayments. Despite being a quarter plagued with the Covid-19 pandemic and weak oil prices, ARMADA has performed well, proving its earnings resiliency. Given the long-term contracting nature of its FPSOs, we view the group to be fairly earnings resilient against the current oil down-cycle. However, we are still mildly concerned over the group’s borrowings level (net-gearing at 2.8x, with total borrowings of RM9.3b). Included in the company’s RM1.7b total short-term loan is RM679.6m, remaining from its Tranche 1 refinancing facility done back in May 2019 which will come due in May 2021. Against its cash balance of only RM850m, we believe monetisation of its non-core assets and/or another refinancing of the portion of these loans in the coming months may be possible in order meet its repayment obligation. Materialisation of some of its trade receivables (which crept up 61% YTD to RM671m) may also help alleviate the obligation.

Maintain “trading OUTPERFORM”, with unchanged TP of RM0.30 pegged to 5x PER on FY21E at -0.5SD below its 12-month mean valuation. Post results, we raised our FY20E/FY21E earnings by 7%/2% to account for higher FPO contributions.

We like ARMADA given its resilient earnings base in the FPSO space, which continues to display trends of strong recovery. However, as we are not entirely comfortable with its high gearing, we would advocate a shorter-term “trading” approach towards the stock, rather than a longer term “buy-and-hold” strategy. We recommend traders to start taking profit on strength when the share price exceeds our TP.

Risks to our call include: (i) poorer-than-expected margins, (ii) costs overrun, (iii) poorer-than-expected asset uptime and utilisation, and (iv) failure to monetise unutilised assets

Source: Kenanga Research - 1 Sept 2020