Stronger balance sheet. Being in the capital-intensive FPSO business, ARMADA’s prospects were clouded by its worrying financials back in 2018 as the tight cash flows have restricted the group from taking on new work. As a result, painstaking restructuring activities such as disposing its OSVs and FPSOs were implemented to pare down the debt, resulting in the group’s gearing level declining from a peak of 2.9x (1Q20) to a more manageable level of 1.2x in 2Q22. With four more assets to be monetized (3 OSVs + 1 FPSO) in the future, we believe the group’s debt management risk will gradually improve over the coming quarters. Also, having restored its financial health, ARMADA is actively scouting for new floating production projects around the world again.

Record earnings in FY22-23. 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 ARMADA’s FY22 profits by RM75.5m or 10.7%. The utilisation of proceeds will be used to pare down its debt, resulting in earnings expanding in a greater margin due to lower interest costs which made up c.22% of the total cost in FY21. All in, we are projecting ARMADA’s core PATAMI to register a decent FY22-24f CAGR of 4%. ARMADA is our top pick for the O&G sector, with a TP of RM0.76.

Undemanding Valuation. At RM0.43, ARMADA is trading at a palatable 3.2x FY23f P/E (66.3% discount against YINSON FY24 P/E of 9.5x), which we think is highly compelling given ARMADA’s foothold in the FPSO business that provides steady recurring income, coupled with speedy enhancement in its debt profile.

A new uptrend leg. After staging a double bottom breakout on 25th August, ARMADA has formed a new uptrend leg. Taking cue from the overbought indicators, ARMADA might experience a mild pullback (possibly to RM0.40-0.41) before advancing to RM0.45-0.50-0.56 levels, forming a higher high pattern. Cut lost at RM0.375.

Source: Hong Leong Investment Bank Research - 20 Sept 2022