Yinson Holdings Bhd - Potential Contract Wins on The Cards

Date: 13/01/2021

Source  :  KENANGA
Stock  :  YINSON       Price Target  :  6.95      |      Price Call  :  BUY
        Last Price  :  4.77      |      Upside/Downside  :  +2.18 (45.70%)

By participating in the retendering of three projects (i.e. Limbayong, Pecan, and Parque das Baleias), we see a likelihood of YINSON securing at least one new contract during the year. Pricing-in a new win assumption, we upgrade our call to OUTPERFORM with a higher SoP-TP of RM6.95. Nonetheless, keen investors should also take note of potential risks arising from potential rights issue and non-Shariah compliance.

Rebidding for three projects. Currently, YINSON is in the midst of rebidding for three projects, namely: (i) Limbayong FPSO, offshore Sabah, Malaysia, (ii) Pecan FPSO, off Ghana, and (iii) Parque das Baleias, off Brazil. These three projects were initially planned to be awarded last year, but given the circumstances (i.e. Covid-19 pandemic, and plunge in oil prices), the timelines were deferred. Nonetheless, as a gradual recovery is underway, rebidding for these projects is expected to be reopened for submission again in the near future. We expect contract awards for all of them to be announced by 2HCY21.

Details on the Limbayong rebidding. According to Upstream, bids are reportedly due for submission on 19 Jan 2021, with likely bidders to include YINSON, MISC, and Sabah International Petroleum (aka SIP, non-listed, formed by the State Government of Sabah). In the original bid, YINSON and MISC were understood to have submitted a joint partner bid, but under the current rebidding, we gathered that both parties will be tendering separately. Meanwhile, SIP was also believed to be the lowest bidder in the previous tender, although technical competency will still have to be taken into consideration. Petronas will be looking for a firm 12 years’ charter, with options for 3+3+2 years for the Limbayong FPSO. Based on our assumptions; (i) 13% IRR, (ii) capex of USD700m, (iii) discounting rate of 6%, and (iv) assuming all options are exercised, we estimate project NPV to be ~USD390m (translating to roughly RM1.45/share).

Details on Pecan rebidding. Previously, YINSON had managed to edge out its close competitor SBM Offshore, securing a letter of intent (LOI) for the Pecan FPSO back in February 2020, only to be subsequently terminated in March 2020 given Aker Energy’s decision to postpone development of the project amidst the Covid-19 pandemic. In an event of a rebidding, we believe YINSON stands a chance to regain the award, given its status as the incumbent winner, coupled with its unrivalled insights as well as early engineering works on the project. Under the original LOI, the charter had a primary term of 10 years, followed by five one-year extension options. Based on our assumptions; (i) 14% IRR, (ii) capex of USD800m, and (iii) discounting rate of 8%, we arrived at an estimated project NPV of ~USD450m (translating to ~RM1.70/share).

Details on Parque das Baleias. Previously, YINSON emerged as the project’s sole bidder after the disqualification of the only other bidder – a partnership between Bluewater and Saipem, due to financial difficulties. After over a year of exclusive negotiations, Petrobras had in October 2020 opted to push back the project’s first oil date by a year to 2024 and subsequently reopened tenders for the FPSO, with scope of the project remaining unchanged. This was done so in efforts to induce some bidding competition for the FPSO, seeking lower pricings. However, given the industry’s backlog capacity, it is likely for YINSON to once again emerge as the project’s sole bidder during this retendering. Based on our assumptions; (i) 14% IRR, (ii) capex of USD1b, and (iii) discounting rate of 7%, we arrived at an estimated project NPV of ~USD650m (translating to ~RM1.80/share).

Upgrade to OUTPERFORM (from MARKET PERFORM previously), with higher SoP-TP of RM6.95 (from RM5.50) – implying 13x PER on FY22E. We upgraded our call and TP after pricing in a potential contract win of RM1.45/share (equivalent to Limbayong FPSO’s NPV, which is the lowest value of the three bids). Seeing that YINSON is deemed a potential favourite in all three of these upcoming tenders, we see it likely for YINSON to secure at least one new win during the year. However, note that our valuations have yet to factor in any potential upcoming equity fund raising / rights issue, which may be necessary in funding these new projects in the event of a contract win. Keen investors should also be wary of the counter’s risk of failing Shariah-compliance during the year.

On a side-note, we also take this opportunity to trim our FY21E/FY22E earnings by 11%/36%, after adjusting our EPCIC profit assumptions to be more in-line with the construction timeline of the FPSO Anna Nery. Note that this is unrelated to any of the aforementioned potential new wins.

Risks to our call include: (i) failure to land new contracts, (ii) project execution risks, (iii) weaker-than-expected project returns, (iv) cost overruns, and (v) termination of contracts.

Source: Kenanga Research - 13 Jan 2021

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