ARMADA's 9MFY24 results were within our expectations but slightly below consensus. Core profit improved YoY due to the full uptime for FPSO Kraken. While no major job wins are anticipated in the near term, ARMADA appears well-positioned to benefit from a potential FPSO asset merger with MISC, which could unlock significant valuation re-rating for its FPSO portfolio if the deal materialises. We maintain our forecasts, SoP-TP of RM0.60 and OUTPERFORM call.

Its 9MFY24 core profit of RM655.1m (after excluding EI of RM0.9m impairment reversal, RM6.7m gain on financial instruments and RM53m gain on revision of FPSO Olembendo charter), met our forecast (74%) but slightly below consensus. No dividend was declared for the quarter.

YoY, revenue surged 17% thanks to the full uptime of FPSO Kraken, which had faced unplanned shutdowns last year. Core profit grew by 61%, driven by lower repair costs for FPSO Kraken and reduced interest expenses.

QoQ, the top line declined by 5% due to lower variation order revenue for FPSO Olembendo. Net profit fell by 19% due to higher operating cost as well as the lower share of results of JVs (mainly caused by Sterling 5 from depreciation and finance costs).

Forecasts. Maintained. The management has guided for impairment on FPSO Kraken in the upcoming 4QFY24 due to difference between its asset carrying value and value in use but that will not be included in our determination for core earnings.

Outlook. Additionally, the group addressed its short-term debt roll-over needs by securing USD400m in new loans, comprising an Islamic syndicated commodity murabahah facility and a conventional syndicated term loan with a 6-year tenor. This refinancing will cover its expiring RM1.5b sukuk murabahah, strengthening its balance sheet and enabling investments in upcoming projects like the Blue Streak CO2 JV (MOU) and Akia PSC, with capex expected to begin in 2026.

While details remain sparse on the potential merger with MISC (MP; TP: RM7.78), we believe ARMADA could benefit significantly. A merger could lead to a rerating of ARMADA's FPSO business, especially if the combined entity commands a higher PER than ARMADA's current valuation. The MOU lasts for 9 months, hence we might see more details surfacing anytime before August 2025.

Valuations. We maintain our SoP-based TP at RM0.60.

Investment case. We like ARMADA due to its: (i) better net gearing position (0.4x in 3QFY24 compared to 1.2x in 2QFY22, (ii) long-term earnings visibility from sizeable orderbook above RM19.7b (including potential extensions), and (iii) still reasonable FY25F PER of 4.4x compared to its 5-year mean of 4.7x despite the projected earnings drop from FPSO Kraken. Upgrade to OUTPERFORM.

Risks to our call include: (i) delay in Blue Streak CO2 JV investment beyond 2026, (ii) potential execution risks for AKIA PSC upstream project, and (iii) FPSO contract extensions are not exercised for core FPSO assets.

Source: Kenanga Research - 25 Nov 2024