ARMADA’s 1HFY24 results were above our expectations but largely within consensus. The group successfully refinanced its expiring RM1.5b sukuk, alleviating its short-term liability risk, paving the way for investment in future ventures. We raise our FY24F earnings forecast to impute higher Sterling 5’s contribution but cut FY25F earnings forecast to largely account for higher FPSO Kraken lease rate discount. We raise TP to RM0.60 and upgrade the stock to OUTPERFORM from MARKET PERFORM after a recent sell-down in its shares.

Its 1HFY24 core profit of RM445.8m (after excluding EI of RM53m gain of charter revision for FPSO Olembendo and RM6.8m gain on the financial instrument), beat our forecast (at 56%) but was largely within consensus (at 54%). We believe that the reason for the surprise was due to stronger-than-expected JV contributions due to higher contributions from 30%-owned FPSO Sterling 5.

YoY, 1HFY24 revenue surged by 23% due to the full uptime of FPSO Kraken, which had experienced an unplanned shutdown last year due to transformer issues. Core profit surged by 79%, driven by lower cost of sales, possibly due to reduced repair costs associated with FPSO Kraken. FPSO Olembendo also reported higher gross margins following a rate escalation in March 2024.

QoQ, the top line declined by 9% due to the absence of the settlement of the operating fee escalation for FPSO Olembendo, which was recognised in 1Q24. However, net profit improved sequentially due to higher JV results, particularly from the stronger contribution of FPSO Sterling 5, as well as lower tax and finance costs.

Forecasts. We raised FY24F forecast by 12% after factoring in a higher contribution from FPSO Sterling 5. However, we trimmed FY25F forecast by 8% to account for lower charter rates for FPSO Kraken post-March 2025, assuming a 70% reduction from the current firm rate compared to the previously assumed 60% discount (as optional extension has not been finalised.

Outlook. In July 2024, FPSO Sterling 5 secured final acceptance from its clients and will begin to generate full lease revenue from 3QFY24 onwards. Additionally, the group’s short-term gearing risk has been largely resolved after securing USD400m in new loans, consisting of an Islamic syndicated commodity murabahah facility and a conventional syndicated term loan with a 6-year tenor. This will enable ARMADA to refinance its expiring sukuk murabahah, worth a total of RM1.5b. The restructuring of its balance sheet paves the way for the group to invest in new upcoming projects, such as the Blue Streak CO2 JV developments and Akia PSC, though capex for these projects may only commence in 2026.

Valuations. We raise our SoP-based TP by 3% to RM0.60 from RM0.58 after imputing a 5% discount to reflect a 2-star ESG rating as appraised by us (see Page 5).

Investment case. We like ARMADA due to: (i) better net gearing position (0.4x in 2QFY24 compared to 1.2x in 2QFY22, (ii) long- term earnings visibility from sizeable orderbook above RM23b (including potential extensions), and (iii) still reasonable PER of 4.4x in FY25F 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 - 23 Aug 2024