1HFY21 results came in above expectations, thanks to stronger-than-expected JV contribution coupled with a positive tax expense during the recent quarter. Core operating profit remains firm, reflecting the steady operations of its Armada Kraken FPSO. Following the recent improved performances and continued efforts in exiting the OSV business, the group had managed to pare down its net-gearing to 1.9x, from 2.1x in the last quarter. Overall, we believe the group’s debt risk is becoming more palatable. Maintain OP with TP of RM0.53.

1HFY21 above expectations. ARMADA recorded 1HFY21 core net profit of RM379m (arrived after adjusting for non-core items e.g. impairments, gains on disposals etc), coming in above expectations at 83% of our, and 80% of consensus, full-year estimates, led by higher- than-expected JV contribution, coupled with a positive tax impact in the 2QFY21 quarter. No dividends were announced, as expected.

Operationally stable. 2QFY21 core net profit came in at RM231m – representing a QoQ growth of 56% from 1QFY21. This was largely boosted by higher JV contribution, coupled with a deferred tax impact resulting in a positive tax contribution. Nonetheless, on the core operating profit level, results were largely flattish – signifying the group’s stable operations, especially from its Armada Kraken FPSO.

Meanwhile, 1HFY21 CNP similarly also jumped 72% YoY. Apart from the aforementioned JV and positive tax impact, results were also helped by higher Armada Kraken FPSO uptime, partially offsetting its poorer OMS segment due to lower number of operating vessels.

Improving balance sheet. During the quarter, the group further disposed two of its OMS fleet, leaving a remainder of 14 vessels in its books. This is in line with the group’s overall strategy of gradually exiting the business to be more focused in the FPSO space in pursuit of a more stable cashflow business model. Following its improved performances thus far, the group’s net-gearing had also been reduced to 1.9x during the quarter (from 2.1x last quarter). In fact, since end- 2019, the group’s total borrowings had managed to be reduced by a total of 18%, down to ~RM7.8b. As such, with Armada Kraken FPSO now reaching stable operations, we see the group’s ability to meet debt repayment obligations as an increasingly plausible reality.

Maintain OUTPERFORM, with higher TP of RM0.53 (from RM0.50 previously). Post-results, we raised our FY21E/FY22E earnings by 12%/6%, after adjusting our assumptions for its tax and JV contribution. Following so, our TP is also raised to RM0.53 – pegged to unchanged valuations of 6x PER on FY22E EPS, in-line with its 3-year mean valuation.

With little 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 - 30 Aug 2021