ARMADA’s 1HFY22 results beat expectations largely due to lower finance and tax expenses, while its top-line performance was flattish. Having restored its financial health (i.e. reducing its net gearing to 1.2x at present from 2.4x in end-FY20), it is actively scouting for new floating production projects around the world. We upgrade our FY22F and FY23F net profit by 11% and 5%, respectively, but maintain our TP of RM0.63 and OUTPERFORM call.

Above expectations. 1HFY22 core net profit of RM428m beat expectations at 71% and 65% of our full-year forecast and the full-year consensus estimates, respectively. The variance against our forecast came largely from lower finance and tax expenses.

Improved results on lower debts. 1HFY22 core net profit rose 13% YoY on a flattish turnover due to: (i) a 16% decline in its finance cost following its efforts to actively pare down its borrowings, and (ii) a significantly lower effective tax rate of 1% (vs. 7% previously) due to the deferred tax impact.

Eyeing new jobs. Having restored its financial health (i.e. reducing its net gearing to 1.2x at present from 2.4x in end FY20), it is actively scouting for new floating production projects around the world again. We believe that this is a right move given the tight global FPSO market at the moment, with ample job opportunities but limited competition as the plates of incumbents are already full.

Forecasts. We upgrade our FY22F and FY23F net profit by 11% and 5%, respectively, but maintain our TP of RM0.63 despite switching our valuation basis to a SoP of project DCF (WACC: 6-8%) (see Page 2) from 6x FY23F PER. Our valuation also reflects a 5% discount to factor in a 2-star ESG rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) various ESG concerns, (iii) project cost overrun and downtime, and (iv) inability to meet debt repayment / refinance existing debts.

Source: Kenanga Research - 29 Aug 2022