Stronger 1QFY22 results came in within expectations, driven by improved vessel availability for its Armada Kraken FPSO, and coupled with lower depreciation and finance costs. The group’s net-gearing continued to be reduced – currently to the lowest since 2015. As such, management is now eyeing expansion opportunities globally. Maintain OP and TP of RM0.63.

1QFY22 results within expectations. 1QFY22 core net profit of RM177m is deemed to be within expectations, at 30% and 28% of our and consensus full-year earnings estimates, respectively. No dividends were announced, also expected.

Continued improvement in earnings. QoQ, core net profit improved 26%, helped by improved vessel availability for its Armada Kraken FPSO, coupled with the lowered depreciation expenses, as well as finance costs due to debt repayment. YoY, core net profit also came in better by 20%, similarly thanks to the higher vessel availability for Armada Kraken FPSO, and lower depreciation and finance costs.

Net-gearing still improving. Following the earlier disposal of its OSVs and turnaround of its FPO operations, the group has managed to further reduce its net-gearing down to 1.3x (from 1.5x last quarter). In fact, gearing levels have been at the lowest since 2015. With its balance sheet turning more palatable, management is now gradually eyeing expansion, and may start participating in global FPSO opportunities within the year.

Maintain OUTPERFORM, with an unchanged TP of RM0.63, pegged to 6x PER, in-line with its mean valuations. Post-results, we made no changes to our FY22-23E numbers.

Our OUTPERFORM call is premised on the group’s seemingly successful balance sheet turnaround story, and with borrowings level looking more manageable, paving the way for expansion opportunities.

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

Source: Kenanga Research - 26 May 2022