Investment Highlights

• We maintain BUY on Yinson Holdings (Yinson) with an unchanged fair value (FV) of RM3.61/share based on an ESG-adjusted sum-of-parts (SOP) 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 invest in renewable energy assets proactively.

• Yinson has entered into an exclusivity agreement with British Petroleum (BP) to potentially supply a floating production storage and offloading (FPSO) vessel to the UK oil supermajor’s proposed 10-well subsea Palas, Astrea and Juno Oil Fields (PAJ project) based in Block 31 offshore Angola.

• The agreement also involves the reservation of FPSO Nganhurra, in which Yinson holds the exclusive purchase option with its owners Woodside Energy and Mitsui E&P Australia Pty Ltd until 30 June 2023 with an optional 6- month extension until 31 December 2023.

• In addition, the vessel reservation will remain effective until 31 December 2022 with an option for BP to extend until 30 June 2023 while both parties negotiate a 10-year contract to convert, operate, maintain and lease FPSO Nganhurra for the PAJ project. The contract is then expected to be executed by the end of 2024 subsequent to BP’s final investment decision within the stipulated period.

• FPSO Nganhurra is equipped with a production capacity of 100K barrels of oil per day as well as a storage capacity of 700K barrels of oil. The vessel was previously operating at the Enfield field in Australia until the autumn of 2018 and is currently laid up outside Labuan, Malaysia.

• Despite the lack of clarity about the contract at this juncture, we gather that the redeployment of FPSO Nganhurra would likely entail a total conversion cost of US$400–500mil, of which BP might fork out a big sum of upfront payment to help Yinson finance the purchase of the FPSO. This would ease Yinson’s capital commitment, thus allowing it to secure another 1–2 new projects without overstretching its balance sheet.

• We also view the contract’s estimated commencement date at the end of 2024 to be favourable for Yinson as it would likely coincide with the completion of conversion works for FPSO Parque das Baleias (PDB) and FPSO Enauta. This would help ensure earnings continuity from its engineering, procurement, construction, installation and commissioning (EPCIC) operations while alleviating capacity bottleneck concerns.

• All in all, assuming a conservative capex of US$500mil (no upfront payment from BP), an estimated daily charter rate of US$400K, a 60% EBIT margin and a project IRR of 15%, we estimate Yinson’s SOP could potentially increase by an additional 6% or RM0.22/share from this charter contract alone.

• Recall that the group is aggressively bidding for up to 7 new FPSO projects, including Eni’s deep-water Agogo block in Angola as well as Total’s Cameia field in Angola and Maka in Suriname. Of these, management is still expecting an award for the Agogo project by the end of 2022.

• We view a thriving FPSO supplier market given the current limited pool of global players decimated by the oil price downcycle since 2014, against the backdrop of a strong pipeline of multiple project awards over the coming quarters. Hence Yinson’s prospects remain promising even if it fails to secure the Agogo project. While still under evaluation, the group’s strategic review to potentially list its FPSO business in Oslo could unlock the segment’s stable recurring revenue and provide additional funds for its promising renewable energy and green tech investments, further entrenching the company’s strong ESG credentials.

• The stock currently trades at a compelling FY23F PE of 14x vs. its 5-year average of 19x for a globally recognised FPSO player with a healthy balance sheet and multiple prospects of substantively expanding its already formidable outstanding order book of RM67bil (US$15.3bil) as of 31 March 2022, which translates to a robust 17x FY23F revenue.

Source: AmInvest Research - 29 Jul 2022