We are positive on the successful refinancing of its existing loans as it alleviates the near term financial risk and reduces going concern risk. Meanwhile, Armada is actively looking to monetise its idle assets at commercially acceptable pricing in order to improve its cash flows. Subsequent to the refinancing, we reduce FY19-20 earnings by 17%/16% factoring additional interest cost. Nonetheless, we upgrade the stock to BUY with a higher TP of RM0.33 (from RM0.20) given the alleviation of financial risk coupled with recovering oil price.

NEWSBREAK

Armada announced that its wholly-owned subsidiaries, Bumi Armada Capital Offshore Limited (BACOL) and Bumi Armada Holdings Labuan Limited (BAHLL) have secured the refinancing of the aggregate principal amounts outstanding under BACOL’s existing term loan facilities of USD380m (RM1.6bn) and BAHLL’s revolving credit facilities of USD280m (RM1.2bn) under a USD660m (RM2.7bn) term loan facilities. The facility comprises Tranche 1 of USD260m (RM1.7bn) and Tranche 2 of USD400m (RM1.7bn) repayable over 24 months and 60 months respectively.

HLIB’s VIEW

Long awaited refinancing news. We are positive on the news as it alleviates the near term financial risk and reduces going concern risk. As the deadline of the new facility is being postponed, Armada is likely to incur additional interest cost of c.RM40m/annum.

Monetisation of assets to improve cash flows. Armada is actively looking to monetise its assets (certain idle OMS and FPO assets) at commercially acceptable pricing. With that, this will help to improve it’s near term cash flows and will be used to repay the loan.

Another RM1.8bn loan waiting to be reclassified. Note that term loan of RM1.8bn related to Armada Kraken is still classified in current liabilities due to not able to achieve final acceptance by the scheduled date earlier on. The project lenders have the right to issue, but have to-date, not issued a notice for full prepayment of the loan. We understand that Armada is still in discussion with clients and is expected to resolve in the near term.

Potential new project? According to Upstream, Armada is the only bidder for India’s Oil & Natural Gas Corporation (ONGC) for a FPSO contract for the KG-DWN-98/2 project. The contract is likely to have firm nine year duration with an option to extend by up to six years. Looking at the current financial situation, we do not discount the possibility of potential cash call if Armada were to secure the job.

Forecast. We reduced our FY19-20 earnings by 17%/16% after factoring additional interest cost subsequent to the refinancing.

Upgrade to BUY, TP: RM0.33. Despite the earnings cut, our SOP-derived TP is lifted to RM0.33 (from RM0.20) after we remove the 40% discount to DCF valuation from our SOP. With near term financial risk alleviated coupled with recovering oil price, we expect sentiment on the stock to turn positive. As such, our rating is upgraded from Hold to BUY. Our target price of RM0.33 has implied FY19 P/E of 8.2x and FY19 P/B of 0.5x, which is slightly above -1SD of its 3-yar mean. Downside risk to our call would be earnings disappointment arising from Kraken operations.

Source: Hong Leong Investment Bank Research - 25 Apr 2019