Notice of suspension issued. Yesterday, ARMADA’s wholly-owned subsidiaries, Bumi Armada (Singapore) Pte Ltd (BASPL) and Armada Oyo Limited (AOL), have each issued a notice of suspension to Erin Petroleum Nigeria Limited (EPNL), a subsidiary of Erin Energy Corporation, to suspend the provision of services by BASPL and AOL under the operational and maintenance services contract and bareboat charterparty contract respectively. The suspension of operations is due to longstanding delays in the charterparty payments due to AOL, as well as irregular payments on the O&M contract to BASPL.

Not a surprise to us. This is not surprising to us as we have been guided that EPNL has not been paying the bareboat charter revenue since 4Q15 and ARMADA has stopped recognising revenue from Armada Perdana in FY16. Recall that Armada Perdana commenced its operation in January 2014 and the firm contract will expire in end 2020 with the option to extend for another 2 more years. Based on our back of envelope calculations, the remaining 3.5 years firm contract value should sum up to USD168m assuming charter rate of USD48m/annum.

Next option. ARMADA stated that it will continue to evaluate all available options including the possibility of working with EPNL to arrive at an amicable solution. Should they fail to reach an agreement, ARMADA, will fully enforce its rights against EPNL based on advice from external counsel.

No changes to our earnings estimates as we have excluded PERDANA from our forecasts. Besides this, ARMADA has also fully provided for the outstanding amount claimed and hence it will not have significant financial impact to the company in FY17.

Kraken aiming to hit first oil by July. We are guided that ARMADA is targeting to hit first oil by July for Kraken FPSO. While Armada LNG Mediterrana is already on hire, Armada Olombendo and Karapan Armada Sterling III are working towards full acceptance after achieving first oil in February and May, respectively. On the other hand, both OSV and T&I segments’ earnings are expected to stay lacklustre in the medium-term with continuous downside pressure on DCR given that the OSV oversupply might not be neutralised in near-term.

Maintain OUTPERFORM. All in, we maintain our OUTPERFORM call on the stock with unchanged SoP-driven TP of RM0.90 in view of better QoQ earnings improvement with Kraken in the picture. Our TP of RM0.90/share implies 12.6x FY18E PER and 0.8x FY18 PBV, which is in line with the industry sector valuation.

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

Source: Kenanga Research - 22 Jun 2017