ARMADA announced the sale of its Armada Perdana FPSO for a total consideration of USD40m, with full payment to be received over >2 years. The sale would result in a one-off gain of ~USD5m in FY19, coupled with a slight decrease in net-gearing to 2.6x (from 2.7x currently). We are positive on the sale, given the unutilised state of the FPSO, although we feel further cash raising efforts are still needed to tackle high gearing issue. Maintain UP and TP of RM0.20.

Sale of Armada Perdana FPSO. ARMADA announced that it has entered into an agreement with Century Energy Services Limited for the sale of the Armada Perdana FPSO, for a consideration of USD40m (or ~RM167m), with Century Energy planning to redeploy the vessel to another field in Nigeria. Full payment is expected to be received over the course 2 years after its first oil date following redeployment (refer below for further details of payment). To recap, operations for Armada Perdana FPSO was suspended in June 2017 after irregular payments from Erin Petroleum Nigeria Ltd. Subsequently in April 2018, ARMADA received a notice from Erin advising of a purported “Force Majeure Event” and requesting immediate shutdown of operations on the Armada Perdana FPSO.

Impact from the sale. With the book value of the Armada Perdana FPSO reportedly (by the press) being previously estimated at RM300m, this would imply a sale valuation of roughly ~0.6x PBV. Additionally, ARMADA is also expected to recognise a one-off gain of approximately USD5m in FY19 (or ~7% of our FY19E forecasts) following the transaction. Assuming full payment of the USD40m consideration, the sale would also help slightly alleviate ARMADA’s net-gearing to 2.6x, from 2.7x currently. That said, all things considered, we still view the transaction as a positive development, nonetheless, given the successful sale of the unutilised FPSO, although we feel that further cash raising efforts are still required over the next 2 years for the company to more fundamentally tackle their high gearing issue.

Maintain UNDERPERFORM, with an unchanged TP of RM0.20, pegged to 0.3x PBV on FY20E – which is at -2SD its 5-year mean valuation. Overall, we continue to remain cautious over the group’s highly geared balance-sheet over the longer-term, while its recent run-up in share price could have also more than priced-in short-term positives.

Risks to our call include: (i) higher-than-expected margins, (ii) sudden surge in OSV utilisation, and (iii) significant improvement in cash raising capabilities.

Source: Kenanga Research - 10 Sept 2019