We were positively surprised by Armada Kraken FPSO’s final acceptance given that the company had just only announced AA2 two weeks ago. We believe the final acceptance would help mitigate ARMADA’s default risks on related borrowings, and also improve earnings and cash flows visibility from the FPSO given full charter rates charged post-full acceptance. Maintain MARKET PERFORM, with raised SoP-TP of RM0.55, from RM0.51 previously.

Final acceptance for Kraken. Last Friday, the company announced that its Armada Kraken FPSO has received final acceptance from the charterers EnQuest and Cairn. The final acceptance was completed in accordance with the requirements set out in the original bareboat charter contract dated 20 Dec 2013, and supplemented by Amendment Agreement One and Two, dated 19 Aug 2016 and 27 Aug 2018, respectively.

Positive surprise. We were positively surprised on Armada Kraken FPSO’s final acceptance at this time given that the company had only announced the Amendment Agreement Two (AA2) on 29 Aug 2018, thereby implying a delay in the final acceptance as compared to its initial guidance of end-June. To recall, terms under AA2 include: (i) compensation payment from ARMADA of USD15m (or approximately RM60m), (ii) further rectification works required on the FPSO, and (iii) agreed compensation payments until the outstanding items are completed. Nonetheless, AA2 is expected to lead to a negative one-off earnings impact of USD25m (or approximately RM100m) in FY18.

Finance impact from final acceptance. Following the final acceptance of Armada Kraken FPSO, we understand the company has now mitigated risk of default for the RM1.9b borrowings involved in Armada Kraken (i.e. should final acceptance not achieved, the lenders could exercise their right to demand immediate full repayment of the borrowings). Additionally, we believe ARMADA will also be receiving the full charter rates for the FPSO post-final acceptance (albeit possibly at a lower-than-original rate after renegotiations in AA2), as opposed to a discounted rate pre-final acceptance, thus leading to improved earnings visibility and cash flows from the FPSO. All-in, we bumped our FY18- 19E earnings by 12% each after increasing our charter rates assumption following the full acceptance of Armada Kraken FPSO.

Maintain MARKET PERFORM. Following the earnings revision, our SoP-TP is also slightly raised to RM0.55, from RM0.51 previously. Nonetheless, we are still slightly worried over its borrowings level (net- gearing of 1.9x as at end-2Q18), and do not discount the possibility of refinancing or capital raising efforts in the near-term, thus limiting its ability for further job bids.

Risks to our call include: (i) better-than-expected margins, (ii) unexpected job wins in the short term, and (iii) better-than-forecasted charter rates received for Armada Kraken FPSO.

Source: Kenanga Research - 12 Sep 2018