We came back from a meeting with ARMADA feeling more assured as termination risk for Kraken remains low despite it likely to miss the backstop date of 1 April while Olembendo FPSO is working towards full acceptance by client. More meaningful QoQ improvement could be seen in 2H17 onwards with Kraken in the picture. With no changes in our estimates, we maintain our MARKET PERFORM call on the stock with unchanged SoP-driven TP of RM0.73.

Low termination risk for Kraken. Despite likely to miss the backstop date of 1st April this year to hit first oil, we see low termination risks as clients are looking to deliver first oil by end of 2Q17 with peak field production at 50k bbl/day and all-in opex cost of USD14/bbl. Given the possible delay, management is negotiating the penalty payable with clients and believe that the amount would be lower than the partial reimbursement of USD65m claimed by clients last year. Revenue recognition will commence only upon full acceptance, which could take a few weeks post first oil.

Olembendo full acceptance in sight. After hitting first oil in January this year, ARMADA has been recognising part of its charter income as revenue and will be able to recognise full charter rates upon full acceptance. On the other hand, as for the Madura project, given that the first gas is delayed by client in order to complete its gas pipelines, ARMADA is in the midst of securing partial reimbursement of operating cost. The client is still aiming to kick start the field by 2H17.

Brighter outlook for FPSO space. ARMADA is seeing more requests for bids and pre-qualifications since end of last year. On-going bids include: (i) ZabaZaba FPSO for ENI, (ii) 98-2 FPSO in India (a JV bidding with Sharpooji), and (iii) Hess in Ghana. Awards of contract are tentatively slated for early 2018 at the earliest while capex are around USD1.0-1.5b each. Meanwhile, ARMADA has decided to withdraw from the bidding of Sepia project in Brazil due to financing issues and inability to get payment guarantees from Petrobras.

OSV segment to remain weak. ARMADA is targeting 50% vessel utilisation this year, which is at cash flow positive level but do not see reprieve in charter rates until 2018/19. OSV contracts are still short- term (less than 12 months) in nature suggesting that oil majors have fairly strong bargaining power in dictating charter rates in view of oversupply situation expected to persist.

No changes to our forecasts. We expect 1Q17 to remain weak, possibly with slight improvement from 4Q16 with minimal contributions from Olembendo (towards end-1Q17) and some earnings contribution from LNG FSU Malta. More meaningful QoQ improvement could be seen in 2H17 onwards with Kraken in the picture.

Retain MARKET PERFORM. ARMADA’s immediate focus is to ensure successful execution of the existing and new projects to strengthen its cash flow. Currently, the net debt/EBITDA is at 5.1x but likely to go up to 5.4x with full commissioning of Kraken and Olembendo (below its debt covenants of 5.5x) and subsequently recede with incoming cash from the two new projects. All in, we maintain our MARKET PERFORM call on the stock with unchanged SoP-driven TP of RM0.73.

Downside risks to our call include: (i) FPSO project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 23 Mar 2017