ARMADA achieved first oil for its 30%-owned Armada Sterling FPSO on 7 January 2024, slightly later than guided. However, our earnings assumption remains conservative, assuming charter contribution from 2QFY24 onwards. The group is actively pursuing final acceptance in the near term. We maintain our forecast with TP held at RM0.58. MARKET PERFORM call maintained.

First oil achieved on 7 January 2024. ARMADA has achieved first oil for its Armada Sterling 5 FPSO. The FPSO will now undergo acceptance tests to attain final acceptance, a prerequisite for the commencement of the FPSO charter. It's important to highlight that ARMADA will receive the full charter income only upon the final acceptance by the client.

Slightly later than earlier guidance. ARMADA initially had projected the achievement of first oil by November 2023; however, the actual date was later than anticipated. Despite this, our earnings assumptions remain conservative, with no contribution from FPSO Sterling 5 in 4QFY23 and 1QFY24. In our FY24 projections, we have assumed a contribution of 4.5% from Armada Sterling 5 to the total earnings base.

Final acceptance possible by end 1QFY24. While the first oil for ARMADA's Armada Sterling 5 FPSO was achieved later than initially guided, we anticipate that both ARMADA and its project partner will secure final acceptance from the client by the end of 1QFY24. It's noteworthy that ARMADA has not provided a specific date for the asset's final acceptance at this point.

Forecasts. Maintained as we assumed Armada Sterling 5’s contribution to commence by 2QFY24.

We also maintain our Sum-of-Parts TP of RM0.58 and MARKET PERFORM call. Our valuation reflects a 5% discount to factor in a 2- star ESG rating as appraised by us (see Page 5).

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 order book 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.

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 - 11 Jan 2024