Management revealed the higher costs for additional works to achieve gas production for FPSO JAK. This will be recognised as revenue in future. Yinson reaffirms its ability to execute current projects within a tight timeline, while being able to absorb another mega contract, with award timeline likely to be in end-18 or early-19. We cut our forecasts by 3-11%, but continue to believe sentiments will focus on longer-term earnings rerating. Maintain BUY. Lower target price to RM5.30.

WHAT’S NEW

FPSO JAK achieved first gas in Jun 18. In an investor briefing yesterday, management shared that there higher costs were incurred for additional works done to help client Eni achieve first gas from the FPSO John Agyekum Kufuor (JAK) in early-Jun 18. The additional cost impact was about RM4m which dragged down 1QFY19 JV income, and a >RM4m cost is likely to be incurred in 2QFY19. We understand the costs have been incurred, and the additional works will be recognised as additional revenue once the client reimburses the costs, as Yinson has a shared operation & maintenance (O&M) arrangement on the FPSO. This was the case for the extra marine work orders recognised in mid-FY18 accounts around the first oil of FPSO JAK and Adoon.

Lam Son and Bien Dong contributions still profitable. In a steady-state situation, FPSO Lam Son and FSO Bien Dong are expected to contribute RM5m-6m to JV income per quarter. This would be the case for 1QFY19 JV income (RM1.1m) if it were not for the additional costs for works done on FPSO JAK. As Bien Dong is on profit breakeven, the JV profit assumption is mostly from the current interim daily charter arrangement for FPSO Lam Son (~US$50,000), until the redeployment terms are firmed up with Petrovietnam possibly by end-18. Management guided that depending on the terms offered, the redeployment terms of long-term or short-term tenures can both be considered.

Short timeline to execute new projects is manageable. JX Nippon has set an end-19 first gas target for FPSO Helang (Malaysia), while First E&P may have set a 3Q19 first oil target for FPSO Anyala/Madu in Nigeria. Yinson has already begun the conversion of FPSO Four Rainbow for the Helang job, and has already secured purchase options of another FPSO asset for the Nigerian contract (pending the completion of the contract award). As both assets are ready-made FPSO vessels, the conversion process and topside refurbishments are less complicated. Despite the timeline of just over a year, management believes they can meet or even achieve early delivery for both projects.

STOCK IMPACT

Lean gearing position. Note that the debts of the JV projects (Lam Son and Bien Dong) have been fully paid off. Yinson’s total debt exposure is on FPSO JAK and the recent loan drawdown for the construction of the FPSO Helang (For Layang). In 1QFY19, RM65m capex was incurred for the first phase of the FPSO Helang conversion. By 2QFY19, the cash balance will increase to RM1b due to the disposal proceeds of the 26% FPSO JAK stake. In view of the continuous project funding required for Helang and Anyala/Madu, management plans to utilise the proceeds to pare down borrowings

Reaffirm its ability to take on more contracts. Yinson retains its view that it is able to absorb another mega contract, despite being already busy with two contracts. First, it has the backing of its strategic partners to fund mega capex projects. Second, management does not foresee immediate near-term awards for future contracts, but more likely towards the end-18/early-19 horizon. Assuming this scenario, certain phases of the engineering works would have been completed and the resources can be easily shifted to work on the new project. Hence, Yinson’s execution ability will not be compromised.

Keen projects in the bidbook. While it is bidding for all projects available, there is a keen interest in the Parque Das Baleias and Marlim FPSO projects in Brazil, due to the no local content requirement. Management is also keen on the Amoca (Mexico) project operated by Eni. The Paradise/Pecan FPSO project for Deepwater Tano in Ghana is likely to be awarded only in 2019 due to the change in client ownership to Aker Energy.

Potential redeployment of assets. FPSO Adoon (Nigeria) has a high chance of seeing another extension after its Oct 18 expiry. For FPSO Allan, management reaffirmed that it is not likely to be extended after the firm expiry of Apr 19. Nevertheless, both FPSOs are of good quality with a good chance of redeployment. On the Ca Rong Do (CRD) project which remains in a force majeure (suspension) status, even if the project is reactivated, management will renegotiate the terms and timeline of the project to avoid straining its overall execution risk. We also understand that the running cost and cost exposure of the project are at minimal levels.

EARNINGS REVISION/RISK

Adjusted FY19-21 earnings forecasts by -11%/-3%/-6%. Our earnings forecasts are based on an unchanged US$/RM assumption of 3.9 but are reduced due to higher finance cost assumptions. We adjusted JV income assumption to reflect the cost upside in FY19 for FPSO JAK and profit contributions from Lam Son. Overall, we expect stable quarterly profits moving forward as the removal of the 26% stake from FPSO JAK’s earnings could be offset by recognising revenues from the additional costs incurred for gas production. Given Yinson’s track record for early delivery, we now assume a partial 1- 2 months’ contribution of the new projects’ earnings in FY20 earnings.

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

Adjust target price to RM5.30 (from 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 five-year mean PE, the higher valuation is justified for long-term investors, as by FY21, the PE will normalise to the mean of 16x. The reduction in SOTP is after removing the option values of FPSO Allan, given the guidance that it will expire after the firm tenure. We factored in 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 PE) 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. Despite the cuts in our forecasts, we believe the near-term earnings decline is well guided by management, and hence the stock sentiment will focus on the longer-term earnings rerating and Yinson further securing more FPSO contract wins. The stock remains a solid choice for long-term investors on its proven contract replenishment and capital management ability.

Source: UOB Kay Hian Research - 29 Jun 2018