1QFY19: Core Profit Impacted By Lower US$

1QFY19 core profit slightly missed consensus forecast on a weaker US dollar and JV contributions. There are no near-term earnings catalysts as the FPSO JAK’s 26% stake divestment was concluded in early-Jun 18. Overall, these are within our expectations. With prudent management guidance of a FY19/20 earnings decline, we still believe stock sentiment will be focused on more potential contract wins that will rerate longer-term earnings forecasts. Maintain BUY. Target price: RM5.65.

RESULTS

• Profits impacted by lower US dollar. Yinson’s 1QFY19 core profit met 20% of our forecasts but missed consensus (meeting only 18% of consensus estimates) forecast. Some of the major one-off items include a net forex loss of RM1m, RM1.5m fair value loss on investments and RM0.6m fair value gain of derivatives. There were no impairments incurred. As expected, the yoy decline in core performance was the result of a weaker US dollar. We note that US$/RM averaged 3.9 during 1QFY19 (in line with our assumption), vs 1QFY18 when the US$/RM was hovering at 4.3-4.4. Also, the lower JV/associate contribution was due to the new lower base of JV income from Bien Dong and Lam Son since 3QFY18, and the absence of one-off extra marine work orders for FPSO JAK (O&M contract). Nevertheless, the JV/associate is back to profit breakeven vs 4QFY18’s loss of RM4.4m due to the downtime and one-off cost of repairs incurred for FPSO Lam Son.
• Net gearing unchanged qoq at 0.9x. Total borrowings remain unchanged at RM3b, mainly incurred for the FPSO John Agyekum Kufuor (JAK). The group’s adjusted net debt/EBITDA (including associates) improved to 2.8x (FY18: 2.9x) as a result of the FPSO EBITDA contribution to pay back project loans. This is in line with FPSO peers.

STOCK IMPACT

• Orderbook. Outstanding orderbook is at US$4.3b, of which >US$2b is firm orderbook. This includes FPSO Helang but does not factor in the FPSO Anyala/Madu contract yet.
• No near-term earnings catalysts. We believe 2QFY19 could be sequentially stronger qoq on forex strength; we note that the 26% stake divestment of FPSO JAK to Japanese stakeholders that was concluded in 6 Jun 18 will further "carve out" 26% of the mega FPSO's profit contribution to Yinson from late-2QFY19. Although there may be a risk of near-term earnings forecast downgrades, we believe disappointments would be small as management had prudently guided for near-term earnings declines for FY19/20.
• With the well-guided earnings decline for FY19/20, stock sentiment will be anchored by contract wins. After securing exclusive negotiations for FPSO Anyala/Madu in Nigeria, Yinson is now leading the pack with two contracts secured among global FPSO competitors. With earnings risk being adequately guided, we believe stock sentiment moving forward will focus on a long-term earnings rerating and Yinson further securing more FPSO contract wins. Yinson can comfortably accept another mega contract, and it is bidding for FPSO projects as large as FPSO JAK. For instance, the FPSO for Deepwater Tano in Ghana (Aker Energy) has an estimated capex of US$1.3b and first oil target of 2021.

EARNINGS REVISION/RISK

• Retain earnings forecast. Our earnings forecasts are based on an unchanged US$/RM assumption of 3.9. The group is expected to hold a briefing soon to provide more updates on its future outlook.
• Risks. Poor delivery. Early termination risk, especially for FPSO Knock Allan. This could reduce earnings forecasts, but be offset by timely early compensation payment.

VALUATION/RECOMMENDATION

• Maintain target price of RM5.65. Our SOTP-based target price is mostly based on DCF on the FPSO, based on US$/RM of 3.9, and implies a forward 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 FY21F, the PE will normalise to the mean of 16x. Our revised target price takes into account the DCF valuation of new projects ie Anyala/ Madu (RM0.57/share) and FPSO Helang (RM0.39/share), while also pricing in an option value of RM1.58/share for a potential mega contract win, assuming a 50-60% win chance.
• Maintain BUY. Yinson’s premium valuation (higher vs BAB’s 12x P/E) is justified by its track record for excellent deliveries. We continue to like its long-term potential, being a major beneficiary of FPSO project bids globally, and potential opportunities with its strategic partners. Investors with a shorter time horizon may avail take-profit opportunities once a large contract is secured, as Yinson may consider divesting stakes during contract execution, and actual earnings recognition will only happen in the long-term. The stock remains a solid choice for long-term investors on its proven contract replenishment and capital management ability.

Source: UOB Kay Hian Research - 28 Jun 2018