ARMADA announced securing debt refinancing worth USD660m. Overall, although this should help mitigate immediate default risks, over the longer-term, its alarmingly high net-gearing still remains a key concern. Moving forward, we believe efforts should be focused on diligent cash flow and operational management to regain some financial footing. Maintain UP with TP of RM0.25, as we are still wary over its longer-term prospects.

Secured corporate debt refinancing. Yesterday, ARMADA announced that it had managed to secure the debt refinancing of: (i) unsecured term loans of USD380m, and (ii) revolving credit facilities of USD280m – totalling to USD660m, into a single facility consisting of: (i) Tranche 1 of USD260m, repayable over two years, and (ii) Tranche 2 of USD400m repayable over five years.

Widely expected. Overall, we were not surprised with ARMADA securing the debt refinancing as we believe it has been widely expected given repeated guidance from management over the past several quarters, on top of news reports in the recent weeks, despite some challenges during the earlier stage of negotiations. That said, the debt refinancing is, nonetheless, undeniably a positive, allowing the company to circumvent its borrowings default risk in the immediate term.

Longer-term issues. However, this still does not mitigate the company’s high level of borrowings, amounting to RM10.4b as at endFY18 - implying an alarming net-gearing level of 2.7x. Additionally, we suspect that the refinanced tenure may be shorter than what management has been initially eyeing for, as we believe the company was looking at securing tenure of 10 years. We also do not discount the possibility that interest costs may be substantially higher following the refinancing, as compared to average interest rates of 4.83% for the revolving credits, and 4.94% for the term loans in FY18.

What’s next? Looking ahead, we believe ARMADA will have to focus its efforts on diligent management of its cash flow and operations to meet upcoming debt repayments. Operations in one of its biggest asset – the Armada Kraken FPSO, had suffered numerous hiccups over the past year, leading to massive impairments of >RM1.6b on the asset in FY18. As such, we believe smoothening out all of its FPSO operations is paramount for the company to regain its financial footing. That aside, we believe further efforts to raise cash could also stem from: (i) favourable outcome from its legal dispute against Woodside Petroleum, possibly raising up to ~USD270m if successful, (ii) possible asset sale or partial-stake sale in one of its smoothly-operating FPSOs, or (iii) cash call from the equity market as a last-ditch effort, although we believe this to be unlikely. Separately, ARMADA is also reportedly close to securing a FPSO contract from ONGC, although we may not be overly positive on this given that they are the only bidder, thus possibly indicating less favourable contract terms on top of issues relating to its capex funding.

Maintain UNDERPERFORM, as we are still wary over its longer-term prospects, although we expect this to serve as a temporary sentiment re-rating. With the debt refinancing having mitigated immediate default risks, we raised our valuations to 0.4x PBV pegged to -2SD from its mean – arriving to a higher TP of RM0.25 (from RM0.09 previously pegged to distressed valuations of 0.15x PBV).

Risks to our call include: (i) higher-than-expected margins, and (ii) sudden surge in OSV utilisation.

Source: Kenanga Research - 25 Apr 2019