We attended a meeting with ARMADA yesterday with our slightly bearish view further reaffirmed in view of the overall weak activities in the O&G industry. Despite weak oil prices, bidding for FPSO project remains relatively active with the company currently bidding for three medium-sized projects in Nigeria, Vietnam and Namibia. Recently, Afren Plc, the parent company of ARMADA’s client, Afren Nigeria has gone under administration but concerns have arisen pertaining to ARMADA’s cashflow generation on the project utilising FPSO Perkasa. We feel more comforted after it is indicated that Amni, Afren’s Nigerian JV partner is most likely to take up Afren’s stake in the oilfield thereby ensuring the continuity of the FPSO’s operations. OSV business division is expected to go through a down-cycle in tandem with weaker oil prices and vessel utilisation at mere 50%. More cold-stacking of OSV vessels are expected as contract offers dry out in the near-term. No significant impairment is expected in the near-term as management has used conservative assumptions in its evaluation of OSV and T&I asset values namely 50% utilisation rate coupled with low rates. Reiterate OUTPERFORM with SoP-driven TP of RM1.17 but no near-term positive catalysts are expected. Investors are advised to focus on the longer term potential of the stock.

FPSO bidding still active with cost cuts seen. Despite an industry-wide slowdown in projects flow, ARMADA is still actively bidding for FPSO projects globally. At the moment, it is bidding for three projects: Nigeria (USD800-1000m contract value estimated), Vietnam (USD400-500m contract value estimated) and Namibia (USD400-500m contract value estimated). On the other hand, the group sees uneven cuts cross its cost chains with 20- 30% cuts in equipment cost seen while crew cost cuts are less severe with 10-12% cuts, which is an indication of flexibility of production players to optimise their cost structure to operate under different oil price scenarios.

More light shed on Afren defunct case. It is not fresh news that Afren Plc, parent company of Afren Nigeria, which is the main client chartering FPSO Perkasa, went into administration recently. However, it is not a concern from ARMADA’s point of view as cash payments are still intact with Amni, Afren’s JV partner in Nigeria for the oil field PERKASA is operating at, will likely take over the remaining stake in the FPSO if Afren Nigeria decides to dispose of its stake. Its current extension will run until May 2016 and it is expected to be extended given the relatively strong production volume from the current field.

Recap on FPSO contractual clauses. To allay concerns over potential contract renegotiation and cuts, it is shared that when FPSO contracts are terminated during its conversion phase, CAPEX committed by the FPSO player will need to be repaid by the client as per the clauses with a 12% margin added on. During production stage, a premature contract termination will result in full payment of contract value, which makes termination an unlikely scenario as long as the asset uptime is maintained above target, thereby implying that the ARMADA’s cashflows are still certain despite the recent severe industry downturn.

More cold-stacking for OSVs. In its 47 vessel strong OSV fleet, 8 vessels are currently cold stacked and more are expected to be cold-stacked in view of weak OSV market in the medium-term with utilisation expected to be at 50% range for a while. Deliveries of 1 and 3 MPSV vessels are expected for FY15 and FY16, respectively, with 3 ice-class vessels expected to be working in the Caspian Sea under a long-term 10-year contract, providing cushion for the downside in OSV earnings. Overall, we do not expect significant recovery in the OSV sector before late next year in view of supply pressures and low oil price expectations.

Further impairments unlikely. Further significant impairments are unlikely for the group in the coming quarters as it has factored in conservative assumptions of 50% for 20 of its OSV vessels with low charter rate in coming years in its latest impairment testing review. On top of that, two of its underperforming assets, Armada Condor and Armada Hawk, have been written down in value significantly (72% down) which is close to the scrap value of the asset.

Maintain OP. We expect no near-term catalyst in the medium-term in view of weak oil prices. Nevertheless, we still believe in the long-term value of the stock given its robust cashflow generation from its core FPSO business. Year 2017 is the year to look forward to with three FPSO contracts expected to come on stream in full swing by then. Maintain OUTPERFORM with SoP-driven TP of RM1.17. Risks to call include: (i) FPSO project execution risk, and (ii) significantly weaker than expected margins for OSV and T&I business. 

Source: Kenanga Research - 11 Sep 2015