Investment Highlights

• We maintain our BUY call on Yinson Holdings (Yinson) with a higher sum-of-parts-based (SOP) fair value of RM5.90/share (from an earlier RM5.53/share), which implies an FY21F PE of 15x.

• Our revised SOP reflects the higher-than-expected operation and maintenance (O&M) contract value for the Layang floating production, storage and offloading (FPSO) vessel, which could be commencing earlier in October this year as compared with the schedule by the end of this year.

• The group has accepted a letter of award from JX Nippon to undertake the vessel’s O&M services for a firm period of 8 years with options for 10 annual extensions, which is estimated to be worth US$578mil (RM2.4bil). This is 67% of Layang’s bareboat charter of US$860mil (RM3.4bil) vs. circa 10%–25% of typical bareboat charters.

• Recall that Yinson paid a novation fee of RM374mil in May last year to take over the Layang FPSO charter (to be renamed Helang), which was originally awarded to TH Heavy Engineering Holdings (THHE) back in November 2014. THHE, however, was unable to complete the project due to financial distress following the downturn in oil prices. The Layang oil & gas field is in close proximity to JX Nippon’s Helang gas development in SK10, off Sarawak, where the field development for the Beryl gas field has also been approved in October 2017.

• Based on just the earlier bareboat charter alone, WACC of 6% and assuming a capex of US$400mil (which we understand could be lower), we estimate that the project IRR could only reach 9%. However, we have already assumed that Yinson would secure the O&M and hence have incorporated a project IRR of 12% to our earlier SOP. With the higher-than-expected Layang O&M revenues, we estimate that the project IRR would now increase to 15.8%. Hence, we have raised Yinson’s FY21F earnings by 9%.

• Besides this project, Yinson is currently bidding for Petrobras’ Marlim I and Marlim II FPSOs, in which Modec appears to be the leading contender. However, Yinson is also expected to bid on 1 March this year for the FPSO for the integrated development of the Parque das Baleias (Parque), which has negligible local content requirement.

• Assuming a capex of US$1.5bil similar to Bumi Armada’s Olombendo FPSO, project IRR of 11%, WACC of 7.7% and debtto-equity financing ratio of 80:20%, we estimate that a single win for any one of the Marlim 1, Marlim II or Parque FPSOs could enhance Yinson’s SOP by RM1.81/share and contribute earnings of RM200mil – 59% of FY21F EPS.

• With the completion of FPSO Helang by the end of this year, Yinson’s project management team is comfortable securing a large project towards early 2019. Given its comfortable FY20F net debt-to-EBITDA of 3x, we do not foresee the need for any equity-raising exercise. Underpinned with locked-in earnings visibility from an outstanding order book of US$4.3bil (25x FY18F revenue), the stock currently trades at a bargain FY21F PE of 11x vs. over 20x for Dialog Group.

Source: AmInvest Research - 15 Feb 2019