Stronger FY21 results came within expectations, driven by lower opex coupled with higher Armada Kraken FPSO uptime. The group’s net-gearing continued to reduce – currently to its lowest since 2015, with management now considering expansion opportunities for the future, although we are still lukewarm about their bidding prospects. Nonetheless, the stock is still premised as a successful balance sheet turnaround story, with borrowings seemingly more manageable and meeting debt obligations a plausible reality. Maintain OP with higher TP of RM0.63.

FY21 results within expectations. ARMADA’s FY21 core net profit of RM673m came in within expectations at 104%/105% of our/consensus estimates. No dividends were announced, as expected.

Record yearly earnings. FY21 recorded its highest full-year earnings, jumping 42% YoY. While this was partially due to higher uptime for Armada Kraken FPSO, the better earnings were also largely driven by lower fixed costs e.g. admin expenses and finance costs, as well as higher share of profits from joint ventures. However, for 4QFY21, core profit of RM140m came in weaker by 9% QoQ and 19% YoY. This was largely due to: (i) poorer OMS segment given the lower number of operating vessels following disposals of its OSVs, and (ii) higher operating costs for its FPO segment following repair and maintenance works for Armada Olombendo FPSO during the quarter.

Net-gearing continued to improve. Following continued disposals of its OSVs and turnaround in its FPO operations, particularly Armada Kraken FPSO, the group has managed to further lower its net-gearing during the quarter to 1.6x (from 1.7x last quarter). In context, the group’s borrowings had been reduced down by 27% since end-FY19 to RM6.9b – its lowest since 2015. This will be even lower next quarter after reflection of a further sale of 3 OSV vessels done recently in Jan 2022, with only 4 vessels remaining in its fleet currently (as opposed to 32 as at end-FY19). With its balance sheet turning more palatable, management is now gradually eyeing expansion, and may start participating in global FPSO opportunities. According to Upstream, ARMADA is one of the bidders for TotalEnergies’ Angola FPSO project, in competition against partnerships of Technip Energies with YINSON, and Saipem with MISC. Nonetheless, we are rather lukewarm on ARMADA’s expansion prospects. Currently, most of ARMADA’s free cashflows are still being used for borrowings repayment, and hence, we feel that source of funds to undertake a capex-intensive project could be a little questionable. We believe one possibility that the group can explore to circumvent this issue is via obtaining assisted funding from the client – similar to YINSON’s approach for its Enauta project.

Maintain OUTPERFORM. We slightly raised our FY22E earnings by 7% post-results model update to account for lower depreciation and finance expenses following the group’s impairment exercises and continued paring down of borrowings. Simultaneously, we have also introduced new FY23E numbers. Meanwhile, our TP is also raised to RM0.63 (from RM0.57 previously), as we roll forward our valuation base year to FY23E, pegged to an unchanged PER of 6x in-line with its mean valuations.

Our OUTPERFORM call is premised on the group’s seemingly successful balance sheet turnaround 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 - 28 Feb 2022