News

• Last Friday, ARMADA announced that it has received a Notice of Termination from its client Woodside Petroleum Ltd (Woodside) to terminate Armada Claire, the Floating Production Storage and Offloading (FPSO) unit, which has been operating at the Balnaves oilfield, north off Australia since first oil delivery in August 2014.
• ARMADA states that the Notice of Termination is not valid and tantamount to a cancellation of convenience or a repudiation of contract, which is entitled for compensation. Hence, it intends to initiate legal proceedings against Woodside.
• Recall that the contract is worth USD457m under a four-year period expiring at 2018 with an option to extend up to 2022.

Comments

• We were negatively surprised by this news having been guided that all the operating FPSOs are still intact during the 4Q15 analyst briefing last month except for one small client having problem servicing full payment of which provision for doubtful debt was made.
• Therefore, it put to question the sustainability of all these FPSOs as well as the upcoming FPSOs which are soon to sail away by July this year.
• We believe there should be compensation if a breach of contract can be proven, but the amount of compensation is unknown at this juncture.
• However, we reckon that this will strain its cash flow and the balance sheet as the chances of Armada Claire being redeployed is low given the challenging environment with limited demand of FPSO units. (Refer overleaf for more details.)

Outlook

• Four of its FPSO projects (Kraken, Olombendo, Madura and Malta) in the pipeline are on track with conversion in the shipyard, looking to sail away by July this year.
• Despite Armada Perkasa being extended for another year, we suspect that the allowance for doubtful debt provided could be on this FPSO, raising further concerns on the sustainability of FPSO contracts.
• Both its OSV and T&I business segments’ earnings are expected to stay weak in the medium-term in view of the weak oil prices which will cap oilfield exploration and development activities. The company has already cold staked 18 vessels and is looking to cold stake two more in the near-term.

Forecast

• FY16/17E net profit is cut by 16.1/14.2% to RM278.6-522.1m after excluding contribution from Armada Claire going forward.

Rating

• Downgrade to UNDERPERFORM from OUTPERFORM

Valuation

• Our SoP-driven TP is revised down to RM0.82 from RM1.17 after: (i) excluding Armada Claire’s valuation, (ii) increasing WACC to 6.48% from 6.13% in view of higher risk of contractual default from clients, and (iii) imputing higher-than-expected net debt as at FY15.

Risks to Our Call

• Upside Risk: (i) Better-than-expected OSV and T&I segments, (ii) Better-than-expected FPSO execution, and (iii) Faster-than-expected recovery in oil prices.

Source: Kenanga Research - 7 Mar 2016