ARMADA’s FY23 results beat our forecast (due to lower operating expenses) but met market expectation. Its FY23 core net profit eased 21% largely due to the downtime for FPSO Kraken. Its FPSO Sterling 5 is pending full acceptance by its client. We maintain our forecasts, TP of RM0.58 and MARKET PERFORM call.

Its FY23 core net profit of RM644.6m (excluding RM78.7m disposal gains from a JV & assets, RM477.6m net impairment on assets, RM16.7m unrealised forex losses, and RM92m reversals for accrued costs related to FPSO Kraken and the disposed offshore support vessel (OSV) business) beat our forecast by 7% but met market expectation. The key variance against our forecast came from lower operating expenses.

YoY, its revenue declined 11% primarily due to the downtime of FPSO Kraken following a hydraulic submersible pump (HSP) transformer failure (which was fully restored by Aug 2023), and diminished revenue from Caspian subsea construction works. Its core profit fell by a sharper 21% as operating expenses surged by 57%, partially mitigated by improved earnings from FPSOs under JVs.

QoQ, its top line improved 19% as FPSO Kraken was fully operational in 4QFY23 vs. partially in 3QFY23. Its core profit jumped 27% on lower operating cost, partially offset by lower share of JV profits.

Forecasts. We maintain our FY24F forecasts and project lower FY25F numbers on the expiration of FPSO Kraken’s firm contract.

Outlook. FPSO Kraken is expected to operate at full capacity in FY24, following investments to enhance transformer redundancy, minimizing the likelihood of future operational disruptions. The company's 30%- owned Sterling V project achieved its first oil at the end of FY23, though the final acceptance by its client is still pending. We assume its operating cost will stabilise at higher levels in FY24, which could be a tad conservative.

Valuations. We maintain our SoP-based TP at RM0.58.

Investment case. 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. Maintain MARKET PERFORM.

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 - 29 Feb 2024