Armada secured 6-year extension contract worth USD285m for FPSO Armada TGT 1. The DCR of USD130k/day is lower than DCR of the firm contract but similar to what was agreed in 2009. No changes to our earnings estimates as we have factored in the extension. However, TP is lowered to RM0.81 (from RM0.85) given the 6-year extension (from 8-annual extension previously). Maintain BUY recommendation on the stock with full acceptance of Kraken project and potential new project win being the catalysts.

NEWSBREAK

Armada has entered a bareboat charter contract with Hoang Long Joint Operating Company (HLJOC) for the charter of FPSO Armada TGT 1 with a firm charter period from 27 August 2018 until 14 November 2024 for USD285m (c.RM1.16bn). To note, the vessel has been operating in the Te Giac Triang field (TGT field) offshore Vietnam under a seven-year firm contract since 1 September 2009.

HLIB’s VIEW

Lock in 6-year extension. We are not entirely surprised by the contract extension as the management has indicated smooth discussion on the contract extension earlier on. Instead of extending it on an annual basis for another 8 years, Armada managed to lock in 6-year extension contract in one go.

Implied DCR at USD130k/day. Based on the contract value of USD285m, the implied daily charter rate (DCR) is about USD130k/day. We were guided that such rate is similar to the annual extension contract agreed when firm contracts were signed back in 2009. Under the new extension contract, other than the customary risks associated with the operations of an FPSO, in the event that the production of Block 16-1, Vietnam falls below an economic level, HLJOC has the right to terminate the contract without any termination fees after 31 December 2021 subject to approval from the co venturers of HLJOC and PetroVietnam and payment of demobilisation costs by HLJOC.

TGT field production at 20.6k bbl/day in 1H18. The TGT field has average production of 20.6k bbl/day in 1H18, according to the latest operating update from Soco International, who has 30.5% interest in it. The operator has updated its full field development plan last year with more infill drillings. The new processing equipment on the H1-WHP has been completed with additional 90k bbl/day with specific handling capacity of up to 65k bbl/day. Thus, we believe the production is likely to remain stable in the next few years. .

Forecast. We understand that the USD341m debt attributable to the vessel has been fully repaid early of the year. Therefore, we expect Armada to generate RM44m (11% of FY19) net earnings from the contract extension for Armada TGT 1, lower than its original contract as no finance cost is charged as the charter rates were renewed at lower rates compared to the charter rate of the firm contract. No changes to our earnings estimate as we have factored in such contract extension.

Maintain BUY, TP: RM0.81. Despite no changes to our earnings estimates, we reduced our SOP-driven TP to RM0.81 (from RM0.85 previously) as we lowered the number of extension years to 6 from original 8 years. Maintain BUY recommendation on the stock with full acceptance of Kraken project and potential new project win being the catalysts.

Source: Hong Leong Investment Bank Research - 6 Aug 2018