The full acceptance granted for Armada Kraken is positive as it allows Armada to receive full charter income and also helps to facilitate its debt refinancing processes. No changes to our earnings estimates as we have factored in full revenue recognition for Kraken since 4Q18. However, TP is lifted to RM0.59 (from RM0.54) with lower discount on DCF-valuation. Maintain HOLD rating on the stock as we do not expect any major contract win in the near term.

NEWSBREAK

Armada announced that Armada Kraken FPSO has been issued with the final acceptance certificate by the client Enquest.

HLIB’s VIEW

Long awaited final acceptance. This is a positive as Armada is able to receive full charter income from Armada Kraken contract. Additionally, we understand that Armada Kraken will be switched from current operating lease model to finance lease model. We should also expect reclassification of RM1.9bn borrowings related to Armada Kraken back to non-current liabilities.

Debt restructuring. Armada is looking to restructure its debt portfolio given that RM2.0b unsecured debt is due in three tranches in October, December this year and May next year. We believe the full acceptance of Armada Kraken will help to facilitate the loan refinancing processes.

Improving production. According to Enquest’s 1H18 results statement, Kraken field’s 1H18 average production were slightly below expectations due to the maintenance shutdown in March and lower water injection rates. However, average production has improved to 33k bbl/day in July and August following the completion of filter maintenance. .

Forecast. No changes to our earnings estimate as we have imputed full charter income from Armada Kraken starting from 4Q18.

Maintain HOLD, TP: RM0.59. Our SOP-derived TP is lifted to RM0.59 (from RM0.54) after we narrowed our discount to DCF valuation on Kraken to 15% from 20% previously. Maintain HOLD rating on the stock as we do not expect any major contract win in the near term.

Source: Hong Leong Investment Bank Research - 12 Sept 2018