ARMADA announced receiving USD75m financing from its largest shareholder, Usaha Tegas (34.9% stake), for (i) USD30m capex funding for the ONGC project, and (ii) USD45m refinancing of bridging loans for Malta FSU. Nonetheless, with projected capex for the ONGC project at ~USD200m, we believe further fund raising could still be necessary, and may even pose as a challenge given ARMADA’s gearing level. Maintain UP with TP of RM0.20.

Receives USD75m financing from Usaha Tegas. ARMADA announced that it has received financing commitments of up to USD75m from Usaha Tegas Sdn Bhd, its largest shareholder with 34.9% stake. The USD75m financing entails: (i) up to USD30m (or RM128m) 3-year term loan facility, to fund the company’s 30% equity interest join-venture project with Shapoorji Pallonji Oil & Gas Ptd Ltd for the deployment of an FPSO at NELP Block KG – DWN 98/2 Development Project Cluster-II field located on the east coast of Kakinada, offshore India. To recap, the FPSO contract was awarded by Oil and Natural Gas Corporation Limited (ONGC) of India in May-2019 (refer report dated 7 May 2019), and (ii) up to USD45m (RM189m) 6-year term loan facility for the refinancing of bridging loans in relation to Malta FSU (remaining charter period of 16 years).

Following this, Usaha Tegas has also been granted options to acquire ARMADA’s 30% interest in the aforementioned ONGC-awarded project at fair market value to be determined by an independent valuer. The options may be exercised at any time within 36 months. ARMADA may also sell its interest in the project to any third party during the option period, subject to obtaining Usaha Tegas’ consent.

Our take on the deal. As we projected capex for ARMADA’s stake for the ONGC contract could be as high as ~USD200m, we believe current financing could be inadequate, and hence, additional fund raising may be required. This could even pose as a possible challenge, given its alarmingly high debt level (netgearing of 2.7x as at end-2Q19, with total borrowings of RM9.9b, of which 26% is still classified as short-term debts). Nonetheless, this USD75m financing from Usaha Tegas is not expected to materially impact its balance sheet’s net-gearing and earnings at the moment.

Maintain UNDERPERFORM, with unchanged TP of RM0.20, pegged to 0.3x FY20E PBV – 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 - 27 Sept 2019