Yinson Holdings Bhd - Confident of Upcoming Wins

Date: 28/06/2019

Source  :  KENANGA
Stock  :  YINSON       Price Target  :  7.75      |      Price Call  :  BUY
        Last Price  :  6.46      |      Upside/Downside  :  +1.29 (19.97%)

We returned from a briefing feeling positive, with added confidence on the potential upcoming wins. YINSON is believed to be close to clinching a Marlim FPSO contract, with an official announcement expected in 3-6 months, while also being in close competition for its other bids in Brazil and Ghana. The company is able to take-on two new projects, but a third win could necessitate an equity fund raising exercise. Maintain OP with higher TP of RM7.75

Confident on new wins. We returned from the briefing sensing stronger confidence from management on the potential new contract wins overseas to materialise, particularly for its bids Brazil. In fact, the company had been ramping up its investments in personnel and expertise in the Brazil for advanced preparation of any new contract wins to come from the country. YINSON is reportedly close to clinching one Marlim FPSO contract although management guides that an official announcement would take up to 3-6 months as negotiations are still undergoing. Meanwhile, YINSON is also understood to be in close competition as front-runners in (i) Parque das Baleias FPSO in Brazil, and (ii) Pecan FPSO in Ghana, where YINSON also widely thought to have an advantage in costing given its existing expertise in Ghana. Any new wins from Brazil would also mark as its debut into the country.

Capacity to take on additional projects. YINSON should have the capacity to take on 2 additional contracts, both financially and operationally, eyeing stakes of around 70-80%. Sumitomo is already set to take-on at least a 20% stake should YINSON win a Marlim FPSO contract, and we suspect a similar equity holding structure to be in place for other future wins as well. However, a third contract win could possibly necessitate an equity raising exercise (about RM500m). Nonetheless, we believe this should not lead to too much of an overhang seeing that it is growth-driven (as opposed to borrowings repayment) and at a very palatable size. Capex per new project is estimated at around USD1b, with a funding structure of roughly 75% debt and 25% equity.

FPSO Helang and Abigail-Joseph to drive mid-term earnings. With project commencement from the potential new wins expected only in 2022-2023, current mid-term earnings growth is largely expected to be driven by FPSO Helang and Abigail-Joseph – both of which are on-track for commencement by end of the year. FY21E is expected to show a significant jump in earnings (+56%, based on current assumptions) on the back of these two FPSOs.

Maintain OUTPERFORM. Overall, we returned from the briefing feeling positive, with added clarity on upcoming potential new wins to materialise. Post-briefing, we raised our SoP-TP to RM7.75 (from RM7.30 previously), as we increased our equity-stake assumption to 70% (from 50% previously) on its second expected win, based on assumptions of (i) 15% IRR, (ii) capex of USD1b, and (iii) discounting rate of 8%. No changes were made to our FY20-21E numbers. Earnings from these new wins are only expected to come in at FY23- 24 upon project commencement. In the meantime, minimal income statement impact is expected as most costs (including finance costs) should be capitalised.

Risks to our call include: (i) project execution risk, and (ii) weakerthan-expected margins, (iii) termination of contracts, and (iv) failure to land new contracts.

Source: Kenanga Research - 28 Jun 2019

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