The FPSO Anyala/Madu contract award is a positive additional prospect that we had not factored into our contract win assumption. Anyala/Madu and Helang will elevate Yinson’s profile with two global FPSO awards ytd, and will boost FY21 earnings significantly. As near-term earnings risk is well-guided and contained, sentiment will be supported by the confidence uplift as Yinson is able to absorb another mega FPSO job. Maintain BUY, with a higher target price of RM5.65.

WHAT’S NEW

• Surprising win of Nigerian FPSO contract. Yinson is in exclusive negotiations for a FPSO contract (7 firm years, 8 optional extensions) from First E&P for the Anyala and Madu fields in Nigeria. This will lead to a contract award, and is an additional positive surprise that had not been guided – both market and our assumptions originally expected Yinson to secure FPSO Helang and one other mega FPSO contract in 2018. The FPSO will be designed for 50k bpd of oil production. Although no other details have been announced, we assume: a) the combined contract value is worth up to US$1b (firm contract valued at $0.6b), b) capex of US$350m, c) project IRR of ~18% vs WACC assumption of 7%. Based on these, we value the FPSO at RM0.57/share assuming a 100% stake.
• We assume first oil to be in late-19 or 2020 (FY21). This is based on the observation that the field’s original first oil target of 2019 had to be amended as the client’s FID for the field was delayed from 2017. We assume Yinson will purchase a ready-made FPSO asset, enabling minimal conversion period required to meet the timeline of the client’s first oil. Around 70-80% debt funding will be required.
• Higher IRR required given country risk. Nigeria is known to be high risk for O&G operations, which partially contributed to the constrained cash flow of direct peer Bumi Armada’s Nigerian FPSO. We believe Yinson has adequately assessed project risks, and will safeguard investor confidence. Yinson has an established track record operating FPSO Knock Adoon in Nigeria (which is still on its extension contract with no major cash flow issues). Regarding its counterparty, First E&P (despite being a small independent oil major) has a tripartite partnership with the Nigerian national oil company and global oil giant Schlumberger for the fields, in which Schlumberger had financed US$700m for the field development. The pact is based on guaranteed project return from future production and assured bank facility payments. Overall, we assume that the required returns for this FPSO are significantly higher than the usual 10-15% project IRR for Yinson’s other projects.

STOCK IMPACT

• Both Anyala/Madu and Helang will significantly boost FY21 earnings. Yinson had also completed all outstanding conditions for the novation of FPSO Helang (Layang field) from TH Heavy in early-Jun 18, marking the start of it executing its first Malaysian FPSO contract. Helang’s total contract value is US$860m across 8 firm years and 10 years of optional extension. We estimate that Helang and Anyala/Madu (both under revenue line) will contribute RM40m-50m yearly net profit each, starting from late-FY20 to FY21 (early-20). Hence, both projects mark Yinson’s significant long-term earnings rerating for FY21.
• Upcoming 1QFY19 results announcement on 28 June. Near-term earnings will likely appear weak due to the weaker US dollar, absence of one-off marine work orders, and lower base of existing JV income from Bien Dong and Lam Son. Also, the conclusion of the 26% stake divestment of FPSO JAK to the Japanese stakeholders at end-May 18 will further “carve out” 26% of the mega FPSO’s profit base from Jun 19. Nevertheless, given management’s track record of solid investor guidance, we believe risk of earnings disappointment will be low as markets had adequately factored in the near-term earnings decline for FY19/20.
• With earnings decline well guided for, stock sentiment will be anchored by contract wins. Yinson is now leading the pack with two contracts secured. With earnings risk already adequately guided for, we believe that stock sentiment moving forward will focus on longterm earnings and Yinson will be ahead of competition in terms of FPSO contract wins. Even though it is now busy with the construction of two projects, management guides that it can comfortably accept another mega FPSO contract. In line with market expectations, Yinson is one of the leading players bidding for FPSO projects as large as FPSO JAK, for instance Deepwater Tano in Ghana (Aker Energy).

EARNINGS REVISION/RISK

• Adjust FY19-21 earnings forecasts by 0%/+1%/+38%. There is minimal impact to nearterm FY19/20 forecasts, but significant adjustments to FY21 earnings, as the new projects are only expected to commence earnings contribution from late-FY20 or FY21. Our earnings forecasts still factor in FPSO Allan’s contract extension. We have also increased capex and net gearing assumptions (which will remain <1x due to cash flow contribution from projects and funding from perpetual securities), which subsequently increases interest expenses. Given that the group is back in growth mode to replenish its long-term earnings base, we rule out future scenarios of special dividends for now
• Risks: Poor execution and early termination risk, especially for FPSO Knock Allan. This could reduce earnings forecasts but be offset by timely compensation payment. We had earlier removed and will continue to assume the removal of Vietnam CRD valuation (RM0.29/share) and are not factoring in a termination fee at this juncture given the uncertainty of the suspension (ie how long this may drag), pending updates of the force majeure situation from Repsol.

VALUATION/RECOMMENDATION

• Raise target price to RM5.65 (from RM4.45). Our SOTP-based target price is mostly based on DCF on the FPSO, based on US$/RM of 3.9, and implies a FY19F PE of 21x. Although this appears to be at +1SD of its 5-year mean PE, the higher valuation is justified for long-term investors, as by FY21 the PE will normalise to the mean of 16x. Our revised target price also takes into account the new DCF valuation of Anyala/Madu (RM0.57/share), FPSO Helang estimate (RM0.39/share), and higher option value of RM1.57/share for a mega contract win (from RM0.77/share), assuming a higher 50-60% win chance. This is due to uplift in confidence for Yinson to secure more contracts given its execution track record, funding strategy and elevated profile among its customers.
• Maintain BUY. Yinson’s premium valuation (higher vs BAB’s 12x PE) is justified by its track record for excellent delivery. We continue to like its long-term potential, being a major beneficiary of FPSO project bids globally, and potential opportunities with its strategic partners. A bull-case target (another large FPSO contract win at 100% stake, or multiple contract wins, and including back the CRD compensation) could lift our valuation further to RM7.00/share. Investors with a shorter time horizon may seize profit-taking opportunities once such large contracts are secured, as Yinson may consider divesting stakes during the contract execution, and actual earnings recognition will only happen in the long term. The stock remains a solid choice for long-term investors on the back of its proven contract replenishment and capital management ability.

Source: UOB Kay Hian Research - 18 Jun 2018