Investment Highlights

• We maintain BUY on Yinson Holdings (Yinson) with an unchanged fair value of RM7.20/share based on an ESG adjusted sum-of-parts valuation. This reflects a premium of 3% for our ESG rating of 4 stars given that the group is the first oil & gas service provider to proactively invest into renewable energy, and implies an FY22F PE of 15x, on par with the FBMKLCI.

• Yinson plans to collaborate with Chile-based renewable energy developer Verano Capital Holdings SpA (Verano) to invest in renewable energy projects in Chile, Colombia and Peru in South America. The collaboration initially targets to progress a pipeline of over 800MW of utility-scale solar projects, of which 330MW are expected to be approved by the authorities within the next 6–12 months. Pending Yinson’s final investment decision and approval, the partnership aims to begin work on the first 100MW within the next 6 months.

• Founded in 2012, Verano has sourced, provided initial investments and developed renewable energy projects in Latin America. Verano has an existing portfolio of over 1GW, with 23 completed projects in operation generating 284,900MWh of clean energy. Verano currently manages the O&M for 5 energy generation projects, while Chile aims to achieve total power generation from renewable sources by 2050.

• Based on the 123MW Granja solar power plant which commenced in March 2020 in Pozo Almonte, Tarapaca region in Chile, the project cost of US$110mil or US$0.9mil/MW is higher than the US$0.5mil/MW for Yinson’s 190MW Nokh Solar Park in Rajasthan, India, which excludes land cost. However, as electricity prices in Chile are higher at US$0.15/kWh vs. India’s US$0.08/KWh, management is still targeting for a project IRR of 10% in this region.

• Together with high shipping costs currently, we estimate that the capex for solar capacity of 330MW could reach US$330mil (RM1.4bil), 25% of Yinson's market cap. However, we highlight that the group could take up minority stakes while international banks could be prepared to fund over 90% of the renewable project costs, which may defray Yinson's equity commitments. Based on an equity-to-debt ratio of 10:90, WACC of 5.5% and equity stake of 50%, we estimate that an additional 330MW solar capacity could raise Yinson’s SOP by 4% or 28 sen.

• As Yinson could opt to almost wholly recycle its renewable energy equity later at lower interest costs after the project’s completion, we remain sanguine on Yinson’s energy transition strategy that is well ahead of its peers and should garner ESG-supported premium valuations over the longer term.

• When its 80%-owned Nokh Solar Park project in India with a capacity of 190MW commences in April 2022, Yinson expects the carbon credits generated together with its 95% stake in the 140MW Bhadla Solar Park II to be sufficient to offset the emissions from the group’s existing vessels, excluding the Anna Nery FPSO scheduled for completion in 2Q2023.

• Meanwhile, the group is awaiting the results for 3 bids submitted for the floating production, storage and offoading (FPSO) charters for Parque das Baleias (PDB) field in Brazil, Pecan in Ghana and Limbayong in Sabah. Yinson expects an announcement by September–October this year for the PDB bid with the group again emerging as the sole bidder from Petrobras’ re-tendering exercise. Together with renewal energy prospects, the group expects to undertake a rights issue of up to RM1bil, 18% of current market cap.

• Additionally, Yinson, together with Technip Energies, have been selected by Total to perform preliminary front-end engineering design (pre-FEED) for 2 FPSO projects to be installed in Block 20/21 in Angola, Africa and Block 58 in Suriname, South America. Including Yinson, 2–3 contractors were selected to undertake this job that will allow Total to choose the best engineering design which could lead to the winner securing the FPSO charters involving substantive vessel capex of US$1bil–US$1.5bil each.

• The stock currently trades at a bargain FY22F PE of only 10x for a globally recognised FPSO player with strong prospects of securing new long-term contracts on a healthy balance sheet and a formidable outstanding order book of RM41bil (US$10bil), which translates to a robust 13x FY22F revenue.

Source: AmInvest Research - 23 Jun 2021