ARMADA: Back to support

Promising outlook. ARMADA is poised for sequential earnings growth in the coming quarters amid (i) better QoQ contribution from Kraken FPSO, and (ii) first oil being achieved in ONGC’s KG-DWN-98/2 in the coming weeks, which will lead to material contribution from Armada Sterling V upon Final Acceptance in 1Q24, based on our estimates. The Kraken FPSO, constituting 35% of the group's FY22 top line, has been fully operational since early August, and we anticipate its full impact to be reflected in 4Q23 earnings. Looking ahead to FY24, the expected the maiden contribution from Armada Sterling V serves as a booster for the group's earnings, projecting a 11.2% YoY increase in its bottom line. We are upbeat in the FPSO space, driven by the prevailing tight market conditions that empower players like ARMADA to negotiate favourable rates for potential new job wins. It is noteworthy that Petronas Activity Outlook 2024-2026 indicates one FPSO job award in 2024 (vs 0 in 2023).

Risk and reward skewed to the upside. Despite the promising earnings outlook and a favorable operating environment highlighted earlier, valuation remains undemanding at FY24F P/E of 4.4x (42.8%  and 68.3% discount against its 5-year and 10-year averages of 7.7x and 13.9x, respectively). This favorable risk-reward scenario, in our perspective, creates an opportunity for investors to accumulate positions. Being in the capital-intensive FPSO business, the company's disciplined approach to capital management in recent years has led to a consistent decline in its net gearing, decreasing from 2.95x in 1Q20 to 0.66x as of 3Q23. This prudent financial approach positions the group favourably to leverage opportunities for new projects. All in, we maintain a BUY on ARMADA with a target price of RM0.71.

Back to long-term support. After correcting 32% from a 52-week high of RM0.73 to RM0.495 yesterday, ARMADA is presently trading near its long-term support range of RM0.48-0.46, with additional crucial supports at RM0.45 and RM0.43 to provide a cushion against further downside. A successful breakout above the RM0.52 hurdle would signify the beginning of an upward trend, propelling the price towards levels of RM0.55-0.60-0.64. Cut loss at RM0.40.

Collection range: RM0.45-0.48-0.49

Upside targets: RM0.55-0.60-0.64

Cut loss: RM0.40

Source: Hong Leong Investment Bank Research - 3 Jan 2024