We are not surprised but overall positive on the contract win by Armada’s 30:70 JV with Shapoorji Pallonji Oil & Gas Private Limited of India. We reckon that Armada may have to expedite its asset monetisation exercise to raise cash or to seek for external funding given its stretched financials (net gearing of 2.7x as of 2Q19). Net earnings contribution from this project is estimated to kick in earliest by 2022, at c.RM30m/annum. Maintain BUY on the counter with unchanged TP of RM0.33 with a potential upside of RM0.05/share from such win subject to further guidance from the management.

NEWSBREAK

Armada announced that its joint venture company, Shapoorji Pallonji Bumi Armada Godavari Private Limited (SPBAG), had received a Notification of Award from Oil and Natural Gas Corporation Limited (ONGC) of India, for the charter hire and operations of one Floating Production, Storage and Offloading Vessel (FPSO). SPBAG is a 30:70 joint venture between Armada and Shapoorji Pallonji Oil & Gas Private Limited of India. The contract has contract value of USD2.1bn (RM8.8bn) a fixed period of nine years with additional seven annual extensions with aggregate contract value of USD655m (RM2.7bn). The FPSO will be operated by SPBAG for the ONGC NELP Block KG – DWN 98/2 Development Project Cluster-II field located on the east coast of Kakinada, offshore India.

HLIB’s VIEW

Not entirely surprised. We are not surprised by the contract win as Armada is the only bidder for this project according to Upstream. The contract win is positive to Armada should the JV be capable of executing the project. Note that this is the third FPSO project with ONGC and fourth project with Shapoorji Pallanji. We reckon that the capex required could be at USD1.0bn-1.2bn assuming project IRR of 7-10%. Thus, Armada will need USD60m-75m for its equity portion at debt equity ratio of 80:20.

External funding needed. Despite its recent successful refinancing of the existing term loan, Armada’s financials are still rather stretched with net gearing of 2.7x as of 2Q19. Armada would have to expedite its asset monetisation exercise to raise cash or to seek for external funding. The management has ruled out the possibility of cash calls at this juncture. This probably suggests that Armada might be seeking another project lender to fund the equity portion.

Forecast. We make no changes to our earnings estimates at this juncture pending more guidance from the company. Given that the FPSO conversion would take about 30 months, the start-up date would likely to be at early 2022. The earnings contribution is estimated at c.RM30m/annum (equivalent to 13% of FY19 net profit), excluding any additional finance cost if Armada were to seek external project lender to fund its equity outlay.

Maintain BUY, TP: RM0.33. Based on our initial estimates, the contract win would add RM0.05/share to our TP assuming firm and extension period, 6.1% WACC, capex of USD1bn and 80:20 debt equity funding structure. We are keeping our BUY rating on the stock with unchanged SOP-driven TP of RM0.33/share. 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-year mean. Downside risk to our call would be earnings disappointment arising from Kraken operations.

Source: Hong Leong Investment Bank Research - 14 May 2019