We believe that Armada’s recent share price weakness (a decline of about c.30% from a high of RM0.575 sen on 7 Feb) accentuates an attractive bargain hunting opportunity as the nature of the group’s FPSO business is pretty much stable due to its recurring income and cash flows – independent from the volatility and movement of crude oil prices. We highlight the following balance sheet improvements: (i) Armada’s net debt position has declined significantly to RM6.1bn as at end-4Q21 (from RM7.4bn as at end-4Q20); and (ii) net gearing has declined for the seventh consecutive quarter to 1.5x as at end-4Q21 from a peak of 2.9x in 1Q20. We maintain our BUY rating with an unchanged TP of RM0.84 based on 7x of FY22F earnings, which is in-line with its 5-year historical mean forward P/E. Armada is our top pick for the O&G sector.

FY21 results recap. Bumi Armada’s FY21 core net profit soared to a record high of RM659.1m, growing 42% YoY on the back of: (i) a 38% increase in profit contribution from its FPSO segment, mainly due to the improvement in Kraken’s performance throughout the year; (ii) increased JV contribution; and a decline in interest expense of RM93.8m (or 19%), reflecting a significant improvement in its debt profile and balance sheet. We are forecasting yet another record high year for Bumi Armada in FY22.

Armada’s share price fell victim to volatility in oil prices. Amidst the volatility over the past few weeks due the ongoing developments in regards to the Russia-Ukraine crisis, Armada’s share price fell about 30% from a high of RM0.575 sen on 7 February 2022 and it last traded at RM0.405 sen. From our findings, we gather that the group’s subsea construction vessels – Armada Installer and Armada Constructor – are currently contracted with Lukoil in the Caspian Sea up to end-2022 under a contract value of c.USD50m. Based on our check with the group’s management, there has been no ground indication of default / non-payment risk from Lukoil.

FPSO recurring cash flows are pretty much unaffected by movement in oil prices. Recall that the group has 4-fully owned FPSOs and 3 JV FPSOs. The nature of the FPSO business is pretty much stable due to its recurring income and cash flows. Its revenue and profit recognitions are independent from the volatility and movement of crude oil prices.

Outlook. We see vast improvement in its balance sheet, cash flows and operational efficiency with the following highlights: (i) FY21 net cash flows from operations has improved by 50% YoY; (ii) lower net debt of RM6.1bn as at end-4Q21 (from RM7.4bn as at end-4Q20); and (iii) net gearing has declined for the seventh consecutive quarter to 1.5x as at end-4Q21 from a peak of 2.9x in 1Q20. Refer to Figures 1 to 2 for more details. The remaining balance of Tranche 1 under the USD660m Term Loan was USD27m, with a maturity in November 2022. We do not foresee any major hurdles in meeting its repayment obligations for Tranche 1. We believe that Armada’s debt management risk is gradually improving over the coming quarters. Armada is looking to dispose 4 more of its remaining vessels in future as the group aims to exit the OSV business entirely.

Forecast. Unchanged.

Maintain BUY, unchanged TP of RM0.84. We maintain our BUY rating with an unchanged TP of RM0.84 based on 7x of FY22f earnings, which is in-line with its 5- year historical mean forward P/E. At about only 3.4x FY22f earnings currently, we think that Armada is highly compelling given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile. The recent weakness in Armada’s share price accentuates an attractive bargain hunting opportunity. Armada is our top pick for the O&G sector.

Source: Hong Leong Investment Bank Research - 21 Mar 2022