Investment Highlights

• We maintain BUY on Yinson Holdings (Yinson) with an unchanged sum-of-parts-based (SOP) fair value of RM5.05/share, which implies an FY19F PE of 14x.

• Our FY18F earnings are maintained for now pending official confirmation that Yinson’s 49% stake in the Ca Rong Do floating production, storage and offloading (FPSO) charter may be terminated due to Vietnam’s territorial dispute with China over the block 07/03 offshore Vietnam, as reported by the media.

• While there has been no announcement yet, media reported that state-owned PetroVietnam has ordered the field operator Repsol to suspend the project, in which up to US$200mil has already been invested. In April last year, the Yinson/PTSV JV was awarded the FPSO charter which has an estimated total aggregate value of US$1bil for the entire 15-year charter inclusive of all five yearly extension options.

• As a service provider, Yinson will be entitled to claim full compensation for the costs incurred for the FPSO, which involve the acquisition of OSX-1 from a distressed Brazilian operator. The upgrading contract for the vessel has yet to be awarded following its purchase from financial institutions.

• Repsol holds a 51.8% operating stake in the Ca Rong Do project which has estimated reserves of 45.3 million barrels of oil and 172 billion cubic feet of gas and 2.3 million barrels of condensate. Its partners are Mubadala Petroleum with 21.3% stake, PetroVietnam 14.3% and PetroVietnam Exploration & Production 12.8%.

• Even after the termination, we understand that Yinson could still own the vessel, which would have been fully paid by Repsol and can be redeployed to new opportunities as 5 new charters are up for tender in Brazil’s Santos pre-salt basin amid proposals to relax local content requirements.

• Nevertheless, the foregone future revenues from a likely charter termination could translate to an 11% reduction in Yinson’s FY20F earnings and a 36 sen (7%) cut in our SOP to RM4.72/share.

• However, the group may also be eyeing a Hess-related FPSO project in Ghana, which could cost over US$1bil, similar to the group’s earlier vessel for Eni. Hess’ TanoCape Three Points off Ghana recently won a territorial dispute with the Ivory Coast, as mediated by the International Tribunal for the Law of the Sea.

• We have already incorporated a potential DCF accretion from the novation of the Layang FPSO and charter extension from the Lam Son charter, which was also discontinued earlier. Underpinned with locked-in earnings visibility from an order book of US$4.2bil (25x FY18F revenue), the stock currently trades at a bargain CY18F PE of 13x vs. over 20x for Dialog Group and Sapura Energy.

Source: AmInvest Research - 26 Mar 2018