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Kenanga Research maintains UNDERPERFORM with lowered Target Price of RM0.190

ARMADA announced that its 30%-stake JV with Shapoorji Pallonji has managed to secure a firm nine-year FPSO charter from ONGC worth USD2.1b. However, we are not entirely positive as we suspect the contract terms may not be overly favourable, seeing that it was the only bidder for this project. Additionally, raising fund for capex may also pose another challenge given ARMADA’s high debt. Maintain UNDERPERFORM with TP of RM0.190.

JV entity secures FPSO project from ONGC. Yesterday, ARMADA announced that via a 30%-stake joint-venture with India’s Shapoorji Pallonji Oil & Gas, the company had managed to secure a contract for the charter hire and operations of an FPSO from Oil and Natural Gas Corporation Limited (ONGC) of India. The contract is for a fixed period of nine years, valued at approximately USD2.1b, with an option to extend for an additional seven years on a yearly basis at an aggregate contract value of approximately USD665m, if all the extension options are exercised. The FPSO will be operating on the ONGC NELP Block KG – DWN 98/2 Development Project Cluster-II field located on the east coast of Kakinada, offshore India.

Not entirely optimistic on contract win. As stated in our previous reports, this contract from ONGC was already anticipated. However, while this new contract award does have some positive merits (e.g. expected improvement of future earnings and cash flow, should operations be executed smoothly), we are not entirely positive. As we gathered via some reported news outlets, the Shapoorji-Bumi JV emerged as the only bidder for the project after other bidders, namely Modec and SBM Offshore, pulled out from the bidding process, perceiving the tender conditions to be “challenging”. As such, we suspect the contract terms may not be too favourable. Additionally, we also suspect raising fund could also pose another challenge as we estimate ARMADA’s capex portion to be as high as ~USD200m, considering ARMADA’s current debt status with total borrowings amounting to RM10.4b (net-gearing at an alarming 2.7x). Assuming net margin of ~30%, we expect this contract to contribute roughly ~RM80-90m per year after the field reaches first gas, expected to be in 2021-2022. Prior to commencement of the FPSO, all relevant costs (including finance costs) will be capitalised (i.e. no income statement impact). Post-commencement, this would be ARMADA’s third FPSO to be currently sailing in Indian waters, after Armada Sterling and Armada Sterling II. 

Maintain UNDERPERFORM, as we remain wary over its prospects. We ascribe valuation at 0.3x PBV, or at -2SD from its mean, given high financial and operational risks; thus arriving at a lowered TP of RM0.19 (from RM0.25 at 0.4x PBV previously).

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

As of 7 May 2019, If you wish to gain exposure on ARMADA, we have ARMADA-C49

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