ARMADA’s 9MFY23 results missed our forecast as FPSO Kraken returned to full operation later than we had expected, but met market expectation. It is now running at full steam. We cut our FY24 net profit by 6%, trim our TP by 3% to RM0.58 (from RM0.60) and downgrade our call to MARKET PERFORM from OUTPERFORM in the absence of any new earnings catalyst.

Below our expectation. Its 9MFY23 core net profit of RM424.8m (excluding RM18.1m disposal gain of a JV, RM15.3m unrealised forex loss and RM1.4m insurance claim in 3QFY23) missed our expectation at only 66% of our full-year forecast but met market expectation at 71% of the full-year consensus estimate. The variance against our forecast came largely from FPSO Kraken only returning to full operations in Aug 2023, which was later than we had expected.

YoY dragged by partial Kraken downtime. Its revenue declined 19.6% YoY mainly due to FPSO Kraken downtime due to HSP transformer failure (which were back up online fully in Aug 2023) and lower revenue from Caspian subsea construction works. Its core profit declined steeper by 21.6% as opex more than tripled YoY, partially cushioned by better JV earnings driven by stronger performance by JVowned FPSOs.

QoQ improvement significant. ARMADA’s topline improved 18.9% QoQ as FPSO Kraken utilization improved in 3QFY23 compared 2QFY23 (where the asset only managed to get back to 60% of preshutdown uptime in early June 2023). Its net profit, on the other hand, more than tripled QoQ as cost of sales declined (-16.3%) largely due to lower FPSO repair cost. Also helping, was the improvement in JV earnings QoQ (+81.5%).

The key takeaways from the results briefing are as follows:

1. Update on Akia PSC – the company will start executing seismic studies in 1QFY24, which will take 3-6 months to be completed and this would progress further into exploration drilling stage if the outcome from the seismic is favourable.

2. A new transformer was installed on FPSO Kraken in Sep 2023. ARMADA has also received an additional new transformer but the group is still awaiting better weather for installation. By and large, FPSO Kraken will be operating in full capacity in 4QFY23 and risk of further breakdown is low.

3. Armada Sterling V (30%-owned) remains moored on East Coast of India preparing for first oil and final acceptance by client. ARMADA has guided that first oil could be in 1HFY24 but the exact date was not provided.

Forecasts. We cut our FY24 earnings forecast by 6% after reflecting slightly fewer working days (c.10 days less) for FPSO Kraken. We keep our FY25 numbers. Our forecasts have not factored in any contribution from Akia PSC, which is still in preliminary stages at this juncture.

Correspondingly, we trim our SoP-based TP by 3% to RM0.58 (from RM0.60). In our view, the market has largely priced in the FPSO Kraken operational recovery and at this juncture, the group has yet to be in advanced stages for any new FPSO project bids.

We like ARMADA drawn by its: (i) better net gearing position (0.7x in FY22 compared to 1.5x in FY21, (ii) long-term earnings visibility from sizeable orderbook in excess of RM20b (including potential extensions), and (iii) potential for long-term growth on the back of multiple potential FPSO and LNG opportunities. However, post Kraken recovery, the group’s earnings will be flattish in the absence of any new project. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) further delay in Sterling 5 JV first oil (beyond FY24), (ii) cost overruns and delays for EPCC projects, and (iii) FPSO contract extensions are not exercised for core FPSO assets.

Source: Kenanga Research - 17 Nov 2023