The Supreme Court of Western Australia has ruled in favour of Woodside, dismissing ARMADA’s claim for wrongful contract termination. We are negative on the loss, given that a favourable outcome was earlier seen as one of the more hopeful avenues of raising cash to pare down its high borrowings level. Nonetheless, we upgrade our call to OUTPERFORM, with TP of RM0.53, as we feel the knee-jerk sell-down coupled with weak market sentiment could provide a trading opportunity.

Woodside vs. ARMADA – judgement passed. On 24 Jan 2020, the Supreme Court of Western Australia ruled in favour of Woodside, dismissing ARMADA’s claim. ARMADA said that it is currently reviewing the judgement and considering possible grounds of appeal. Any appeal is to be lodged by 14 Feb 2020.

To recap: ARMADA and Woodside entered into a contract for the provision of Armada Claire FPSO dated 30 Sep 2011. On 4 March 2016, Woodside purported to terminate the contract due to “performance-related issues”. Subsequently, ARMADA then filed against Woodside on grounds of “wrongful termination”, seeking damages of USD275m. The trial was held on 18 Feb 2019 and concluded on 27 March 2019.

Negative on the news. Overall, we are negative on the news, as a favourable outcome against Woodside could have been one of the more hopeful avenues for ARMADA to raise cash to pare down its borrowings. As it stands, ARMADA currently has a net-gearing of 2.6x, carrying a total debt of RM9.9b as at end- 3QFY19, of which RM2.8b are still classified as short-term debt, although RM1.5b related to Armada Kraken FPSO is expected to be reclassified as long-term debt in the near future.

Other avenues for raising cash. From here, we believe other possible avenues for ARMADA to meet debt obligations would include: (i) sale of unutilised OSVs (58% utilisation in 3QFY19), (ii) improvement of cash flows following operational recovery of Armada Kraken FPSO, and (iii) commencement of upcoming 30%-stake JV project with ONGC (guesstimated commencement in ~2 years’ time). Should all these be insufficient, further possible last ditch efforts may include: (i) paring down stakes in current FPSO projects, or (ii) equity fund raising.

Upgrade to OUTPERFORM (from MARKET PERFORM), with unchanged TP of RM0.53 pegged to 10x PER on FY20E EPS. While the high net-gearing still remains an underlying key concern, we feel that the knee-jerk sell-off, coupled with weak market sentiment, could be a trading opportunity.

Risks to our call include: (i) sustained plunge in global markets’ sentiments, (ii) weakness in oil market outlook, and (iii) operational hiccups hindering cash flows

Source: Kenanga Research - 29 Jan 2020