ARMADA announced that one hydraulic submersible pump (HSP) transformer on FPSO Armada Kraken has been reconditioned and reinstalled. Following this, the vessel is now operating at 90% of pre-shutdown levels after recommencing operations in 20 July. We are positive on the progressive restoration of Kraken’s production. As such, this will cushion concerns of a major financial impact. We maintain our forecasts, TP of RM0.62 and OUTPERFORM call.

A whisker away from full recovery. To recap, back in 2 June, ARMADA reported that FPSO Kraken had experienced a production shut-in due to the sudden failure of its HSP transformer units. Thereafter, on 21 June, the FPSO finally achieved start-up and was able to operate at circa 60% of pre-shutdown levels.

Commendable restoration efforts. We are positive on the progressive restoration of Kraken’s production. Based on this rapid pace, we gauge that operations are on track to fully normalize within the next 1-2 months. This is given our expectations that ARMADA will resume further testing and investigations to fully restore the vessel’s performance. Nevertheless, we applaud ARMADA for reinstating operations close to full capacity in less than two months since the first shut-in announcement.

But some concerns linger. As such, the above will cushion concerns of a major financial impact on ARMADA. Recall that the company had earlier guided of a material impact during Kraken’s full shut-down. On the flip side, investor sentiment may still be dragged by the lingering concerns below: (i) possibility that the magnitude of the financial impact will turn out larger-than-expected, (ii) substantial vessel repair and maintenance costs will not be fully covered by insurance, and (iii) client Enquest may request for reimbursement or impose penalties on ARMADA.

Forecasts maintained. To recap, as a conservative measure, we had earlier factored in partial loss of bareboat charter income from Kraken in Jun-Aug CY23. As such, our current forecasts reflect a benign 9% impact from this shutdown.

We also maintain our Sum-of-Parts TP of RM0.62 and OUTPERFORM call. Our valuation reflects a 5% discount to factor in a 2-star ESG rating as appraised by us (see Page 5).

We like ARMADA for: (i) sustained traction in its efforts to deleverage its balance sheet (current net gearing: 0.8x), (ii) long-term earnings visibility from substantial orderbook in excess of RM20b (including extension options), and (iii) it being the leading contender for a USD1b EPCC contract for FPSO Cameia.

Risks to our call include: (i) offshore production projects being held up due to weak crude oil prices, (ii) cost overruns and delays for EPCC projects, and (iii) clients do not exercise optional extensions for the FPSO fleet.

Source: Kenanga Research - 21 Jul 2023