ARMADA’s improved FY22 results are within expectations, driven by higher vessel availability for the Kraken FPSO and subsea construction works. Its net gearing is currently the lowest since 2015, and as such, the group is in a strong position to expand again by actively bidding for FPSO tenders globally. We raise our FY23F earnings by 12%, lift our TP by 19% to RM0.75 (from RM0.63) and maintain our OUTPERFORM call.

Within expectations. FY22 core net profit of RM764m met expectations. FY22 core earnings grew 14% YoY, largely thanks to higher vessel availability for Kraken FPSO (shutdown in 1 of 2 trains in the year prior), and subsea construction work in the Caspian Sea. The results were also further helped by the positive tax impact as a result of deferred taxes.

Continued to pare down debts, in position to bid again. The group continued to pare down its borrowings, with net gearing currently at a low of just 0.9x – the lowest since 2015. With its balance sheet health more or less restored, the group is currently eyeing expansion opportunities and has been actively participating in international FPSO bids. Given how tight the global FPSO market is as incumbents have already filled up most of their capacities, financing options provided by the clients are now very favourable for contractors such as ARMADA.

Forecasts. We raise our FY23F earnings by 12% as we reduce our assumptions on finance and depreciation expenses as it continues to pare down debts and dispose its offshore support vessels. We also introduce our FY24F numbers.

We lift our SoP-TP to RM0.75 (WACC: 6-8%) from RM0.63 as we roll forward our valuation base year to FY24F. Our valuation also reflects a 5% discount to factor in a 2-star ESG rating as appraised by us (see Page 4).

Overall, we like ARMADA given the following reasons: (i) it is the sixth largest FPSO provider in the world, and the second largest among Malaysian players, (ii) as a dark-horse play to secure new contracts within the coming months to act as a re-rating catalyst, and (iii) its successful balance sheet turnaround story. Maintain OUTPERFORM.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) various ESG concerns, (iii) project cost overrun and downtime, and (iv) inability to meet debt repayment / refinance existing debts.

Source: Kenanga Research - 27 Feb 2023