9MFY21 results came in above expectations, thanks to higher Armada Kraken FPSO uptime, coupled with lowered finance costs amidst continued debt repayments. While the quarter did see some mild unplanned shutdowns, overall operations remained stable, with the group’s net-gearing levels having greatly improved over the past few quarters. Given the group’s debt risk becoming more palatable, we maintain our OUTPERFORM call with a TP of RM0.57.

9MFY21 results above expectations. ARMADA posted 9MFY21 core net profit of RM533m (arrived after adjusting for non-core items e.g. impairments, unrealised forex, gains on disposals etc) – coming in above expectations at 104%/90% of our/consensus full year estimates, due to: (i) stronger-than-expected contributions from floating production and operations (FPO) on higher uptime, particularly for Armada Kraken FPSO, (ii) stronger-than-expected contributions from its offshore marine services (OMS) amidst continued downsizing of the segment, and (iii) lower-than-expected finance costs amidst continued efforts in debt reduction. No dividends were announced, as expected.

Operationally stable. Cumulatively, 9MFY21 CNP improved 76% YoY, mostly thanks to improved vessel uptime for its Armada Kraken FPSO. This was also partially helped by the improved OMS performances following continued downsizing of lesser performing assets within the segment. Meanwhile for 3QFY21, the quarter recorded core net profit of RM155m – representing a 33% decrease QoQ. This was mainly due to lower vessel availability for Armada Kraken FPSO as one of the two trains undergone an unplanned shutdown coupled with lower management fees received as compared to last quarter (recorded under “other operating income”).

Improving balance sheet. During the quarter, the group further disposed four vessels in its OMS fleet, leaving a remainder of 10 vessels. 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. Meanwhile, the group also continued its effort of paring down its borrowings, with net-gearing currently standing at 1.7x (down from 1.9x last quarter). In fact, since end-2019, the group’s total debts had been reduced by 22%, down to RM7.4b from RM9.5b. Coupled with operations now being more stable, we feel that the group’s borrowings risk has greatly diminished as compared to yesteryears.

Maintain OUTPERFORM, with a higher TP of RM0.57 (from RM0.53 previously) – pegged to unchanged valuations of 6x PER, in-line with its 3-year mean valuations. Post-results, we raised our FY21E/FY22E by 26%/8% to account for higher FPO and OMS contributions, as well as lower finance cost assumption.

Our OUTPERFORM call is premised on its balance sheet recovery story, with borrowings level looking more manageable and meeting debt repayment obligations a plausible reality.

Risks to our call include: (i) downtime in Armada Kraken FPSO, (ii) costs overrun, (iii) failure to meet debt repayment obligations.

Source: Kenanga Research - 22 Nov 2021