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Cashflows vs. ESG pursuit

Maintain BUY and MYR0.58 TP

BArmada’s ESG statement and decarbonisation roadmap is average and is understandably not as progressive as that of its global peers, for its immediate priority is to improve its financial footing (grows earnings, cashflows and de-gear) and deliver FPSO Kakinada. In essence, its turnaround story has just begun to gain traction. Our TP is SOP-based.

ESG roadmap: Decent but not the best in class

BArmada’s ESG framework is aligned with the relevant United Nations Sustainable Development Goals. As an O&G service provider, it is: (i) committed to reducing the carbon footprint across its operations and (ii) in compliance with the IMO requirements on marine pollution and local governing bodies. While BArmada has generally been consistently gathering, monitoring & disclosing its natural capitals data since 2016, its Sustainalytics ESG risk ratings (High) and scores (33) are relatively sub-par vis-à-vis its peers: (i) SBM (Low; 19), (ii) Yinson (Medium; 22) & (iii) Modec (Medium; 29), which we concur. In our view, there is a shortfall in the area of disclosures, especially on the environmental aspects.

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Prioritising financial health over sustainability now

Setting up: (i) a more comprehensive ‘E’ targets/ agenda (i.e. better disclosures, baseline & emissions reduction, offsets, carbon neutral, energy transition) and (ii) short-/mid-/long-term sustainability frameworks would be well-received. That said, BArmada’s immediate targets are to: (i) prioritise for a stronger financial standing (earnings recovery, improved balance sheet & cash-flows) and (ii) deliver 1 FPSO project (Kakinada) over the increased push for green, ESG-related considerations; in a related manner, , a realistic proposition, for now.

Key targets: Improve EBITDA, reduce debts

Its net debt/ net gearing levels remain elevated; at MYR6.9b/ 1.9x now. Improving cashflows and monetizing non-core assets remains its key KPIs. Constant EBITDA improvement, via higher operating efficiencies, charter extensions on its FPSOs and cost optimisation through disposal of OMS assets & re-activation of the idle FPSO Claire would greatly lower its net debt/ EBITDA, which stood at 5x now.