ARMADA’s 1QFY21 CNP came in above expectations amidst lower-than-expected operating costs. Overall, uptime in Kraken FPSO continued to remain stable, despite some planned shutdowns during the quarter. The group also managed to dispose 11 OMS vessels during the quarter, reducing its net-gearing to 2.1x. With the extended debt maturity secured earlier in the year, coupled with its stabilising FPSO operations, we believe ARMADA’s high debt situation should gradually become more palatable over the coming quarters. Maintain OP with higher TP of RM0.50.

Above expectations. 1QFY21 core net profit of RM148m (arrived after

adjusting for non-core items e.g. gains on disposals, reversal of impairments, unrealised forex etc) came in above expectations at 33% of our full-year earnings forecasts, and 35% of consensus, due to lower- than-expected operating costs. No dividends were announced, as expected.

Quarter saw planned shutdowns. YoY, 1QFY21 core net profit came

significantly stronger, thanks to improved vessel availability for Armada Kraken FPSO, offsetting higher operating costs from Armada Olombendo FPSO. Meanwhile, its OMS division also recorded improved performance, helped by lower operating costs despite the lower vessel utilisation (44% vs. 56%). QoQ, net profit dipped, from planned shutdowns in Armada TGT 1 and Armada Kraken FPSO, coupled with the lowered OMS vessel utilisation of 44% vs. 49% from the previous quarter.

Managing debt risks. We believe the group’s debt risks should

become gradually more palatable in the coming quarters. In 1QFY21 alone, the group managed to dispose 11 OMS vessels, with its net- gearing reduced to 2.1x from 2.4x in 4QFY20. While this is still not a comfortable low level, the successful extension of the Tranche 1 borrowings earlier this year to November 2022, from May 2021 initially, means that short-term repayment risks should be minimised. With Armada Kraken FPSO now achieving optimum uptime, successful full repayment of this Tranche 1 borrowing seems increasingly likely (bearing in mind there is another Tranche 2 facility due May 2024).

Maintain OUTPERFORM. Post-results, we raised our FY21/22E

numbers by 3% each to account for lower operating cost assumptions. Subsequently, our TP is also slightly raised to RM0.50 (from RM0.49 previously), pegged to unchanged valuation of 6x PER on FY22E EPS – in line with its 3-year mean valuation.

We believe with no risks of immediate debt repayments and earnings fluctuations, ARMADA should warrant an OUTPERFORM call, especially considering its discounted valuation.

Risks to our call include: (i) downtime in Armada Kraken FPSO, (ii)

costs overrun, (iii) failure to meet debt repayment obligations.

Source: Kenanga Research - 27 May 2021