News

• Armada has suspended the bareboat charter and operations & maintenance (O&M) on FPSO Perdana to Erin Energy Corporation due to longstanding delays in payments due to Armada.

• The potential settlement amount by Erin is unknown at this juncture as Armada is now in discussion to reach a mutual agreement on the appropriate settlement.

Financial Impact

• We are not surprised about the announcement as the client has stopped paying FPSO charter to Armada since start of 2016. No earnings are recognised in the year for Armada Perdana.

• It would not have a major impact to our earnings forecast as we have not accounted earnings contribution from Armada Perdana for 2017

• The group on this FPSO as it has provided RM91.4m for doubtful debts in FY16 to account for potential non-payment by Erin. Further provision by the group would be subject to the final settlement amount of the contract post cancellation.

• Loans on the asset have already fully pared down years ago. Therefore we do not anticipate further liability to be incurred by the group.

Pros/Cons

• The announcement is actually more beneficiary for Armada compared to the current situation.

• In addition, Armada would be able to redeploy the asset to be utilised for bidding of other FPSO contracts if Erin is not paying up on its obligations.

Risks

• Execution risk;

• Prolonged low oil price; and

Forecasts

• Maintain forecast.

Rating

HOLD ( ↔ )

• Earnings are expected to be stronger this year with new projects expected to come on stream. However, the continued delay in delivery of Armada Kraken would place overhang on the sentiment on the stock.

Valuation

• SoP-driven TP is maintained at RM0.72 with HOLD call maintained on the stock. Our valuation has already excluded value from Armada Perdana.

Source: Hong Leong Investment Bank Research - 22 Jun 2017