News

Over the weekend, The Edge Weekly reported that MISC Bhd (OP; TP: RM10.64) is considering injecting its offshore facilities, including six floating production storage and offloading (FPSO) vessels, and four floating, storage and offloading (FSO) vessels of its 15 offshore facilities into ARMADA.

Apart from that the discussion, according to the news report, is still at the preliminary stage and also includes the sale of MISC’s 51% equity interest in FPSO Ventures Sdn Bhd. It was also said that a senior officer mentioned that the deal is “possible”.

Comments

We are neutral on the news as no further details on the corporate deal were given. However, such a deal if materialised would definitely enhance its position as one of the top five FPSO players in the world.

All ten offshore facilities are currently contracted and the offshore business is estimated to generate c. RM660m PBT per annum. Assuming a PER of 20x (which is the average PER of local FPSO players), the FPSO business should at least be worth RM9.9b.

If the acquisition is completed by the middle of next year, it will increase ARMADA’s earnings to RM647m in FY16 (half-year contribution from the newly acquired assets) from RM400m and to RM1.3b in FY17 from RM812m (full-year contribution).

We believe ARMADA is likely to fund the acquisition through share issuance due to its already high net gearing. (1.0x in FY16E). Assuming an acquisition value of RM9.9b, ARMADA has to increase its share base by 1.7 times based on current share price. Hence, post acquisitions, FY16/17E earnings are expected to be diluted by 40/41%.

If the acquisition goes through, MISC will own more than 60% in ARMADA, which also means that Petronas, the major shareholder of MISC, will have an effective stake of 40% in ARMADA.

While the actual financial impact can only be ascertained pending the acquisition value, our back-to-envelope calculations show that acquiring MISC’s offshore business even at the sector average of 20x would not be earnings accretive to ARMADA at this juncture given that ARMADA is currently trading at a low implied CY17 PER of 7.2x. The potential benefit to ARMADA would be in securing more projects from Petronas over the longer run.

Outlook

We do not expect a recovery in both OSV and T&I segments’ earnings in the medium-term in view of the weak oil prices which will cap oilfield exploration and development activity.

Four of its FPSO projects (Kraken, Olombendo, Indonesia and Malta) currently in the pipeline are progressing well with conversion in the shipyard, poised to be delivered to its client as scheduled, and giving strong incremental free cashflow for the group in the coming years.

Further impairments on its OSV & T&I assets of similar quantum in this 2Q15 are unlikely given the conservative assumptions made by the management on its assets’ value in use in the current quarter.

While near-term earnings are expected to be unexciting, we look forward to its performance in 2017 as most of its upcoming FPSO projects are in full swing.

Forecast

Earnings and forecast are maintained for now.

Rating

Maintain OUTPERFORM

Valuation

TP is maintained at RM1.17 based on SOP valuation method.

Risks to Our Call

FPSO project recognition risk.

Lower-than-expected margins.

Source: Kenanga Research - 9 Nov 2015