Buy the dip. Being HLIB’s O&G top pick, ARMADA’s share price has plunged 26% from a 52-week high of RM0.575 to close at RM0.425 yesterday, as widespread sanctions on Russia following the conflict with Ukraine triggered concerns over ARMADA’s subsea construction vessels (i.e. Armada Installer and Armada Constructor) that is currently contracted with Lukoil (a Russian energy MNC) in the Caspian Sea up to end-2022. Overall, we reckon that the Russia-Ukraine conflict has no material impact on ARMADA as Lukoil has not been sanctioned by US or Europe. Based on our channel check with the group's management, there has been no ground indication of default/non-payment risk from Lukoil.

Recurring nature business. To recap, ARMADA currently has four fully-owned FPSOs and three JV FPSOs. The FPSOs business is stable with recurring income and cash flow throughout the tenure period, and its performance is independent from oil price volatility and movement. While the risk of default from the oil producing entitles will be a potential risk for ARMADA’s FPSOs business, we note that National Oil Companies (NOCs; O&G companies that are majority-owned by a national government e.g. Pemex and Saudi Aramco, etc.) producing entitles’ breakeven cash-flow levels is around Brent oil price of USD30-35/bbl while profit-after-tax breakeven would be around US$45-50/bbl (versus Brent oil prices above USD100 now). The high oil prices that keep NOCs producing entitles profitable will lower default risk to ARMADA.

Also, the ongoing disposal activities in its OSV is deemed to be earnings accretive given the absence of its loss in the OSV segment would enhance A RMADA’s FY22 profits by RM75.5m or 10.7%. The utilisation of proceeds will be used to pare down its debt and further strengthen its balance sheet. Despite vast improvement in its balance sheet coupled with a better earnings outlook, ARMADA is currently trading at an undemanding valuation of 3.5x FY22 P/E (72% and 50% discount against its 5-year average of 12.5x and HLIB’s TP parameter of 7x, respectively). Shrugging off Lukoil’s risk, we believe that the battered stock offers excellent opportunity for investors to accumulate on weakness.

Resistance breakout. After staging a 14% oversold rebound, ARMADA is currently challenging its mid-term resistance of RM0.43. A successful breakout above this hurdle will spur the prices toward RM0.47-0.50 levels. Cut loss at RM0.38

Source: Hong Leong Investment Bank Research - 29 Mar 2022