ARMADA posted a weaker 3QFY20 (but beat expectations, nonetheless) due to the planned maintenance shutdown of Armada Kraken FPSO during the quarter. However, we are still cautious over the group’s high borrowings level (net gearing of 2.6x), with short-term debt of RM1,663m versus a cash pile of merely RM923m. Included in the short-term debt is a Tranche 1 corporate debt facility amounting to RM656m coming due in May 2021. Downgrade to UNDERPERFORM with a lower TP of RM0.21.

Above expectations. 9MFY20 recorded core net profit of RM302.5m (arrived after adjusting for non-core items e.g. impairments, unrealised forex, re-measurements etc), coming in above expectations at 91% of our, and 83% of consensus, full-year earnings forecasts, as we were overly cautious on the impact from Armada Kraken FPSO’s planned maintenance shutdown during the quarter. Nonetheless, absence of dividends is well within expectations.

Results dragged by Kraken planned maintenance. QoQ, 3QFY20 core net profit of RM82.5m represented a 37% decline, mainly dragged by the lower vessel availability for Armada Kraken FPSO due to a planned maintenance shutdown. Typically, planned maintenance shutdowns should not impact revenue received from an FPSO contract. However, all of the allowable maintenance shutdown allocation for Armada Kraken FPSO were already utilised earlier in its life-cycle as the asset faced difficulties during its start-up. Cumulatively YTD, 9MFY20 saw core net profit growth of 34%, from the higher vessel availability for Armada Kraken FPSO.

High borrowings level still worrying. The group’s net-gearing remains an alarming 2.6x, carrying short-term debts of RM1,663m versus a cash pile of merely RM923m. Included in the short-term debt is a Tranche 1 corporate debt facility amounting to RM656m that was refinanced back in May 2019 and will come due in May 2021. Additionally, the group has also cited that it expects progress of asset monetisation initiatives to be delayed due to weakened business sentiment and travel restrictions imposed globally following the Covid- 19 pandemic. As such, in order to meet these near-term debt obligations, we believe a recapitalisation exercise (either via equity or debt) could be inevitable in the coming months.

Downgrade to UNDERPERFORM (from “Trading OUTPERFORM”), with a lowered TP of RM0.21 (from RM0.30) as switched our ascribed valuation to 0.3x PBV on FY21E BVPS at -1.5SD below its mean (from 5x PER) to better reflect its debt repayment and balance sheet risks. Post-results, we raised our FY20E/FY21E earnings by 19%/23% to account for higher FPO contribution. As the coming Tranche 1 debt facility repayment date of May 2021 is too close for comfort, we have opted to downgrade our stock call to UNDERPERFORM.

Risks to our call include: (i) better-than-expected asset monetisation efforts, (ii) shareholder bail-out, (iii) better-than-expected cash flows.

Source: Kenanga Research - 20 Nov 2020