Investment Highlights

• We maintain BUY on Yinson Holdings (Yinson) with unchanged forecasts and sum-of-parts-based (SOP) fair value of RM4.72/share, which implies an FY19F PE of 15x.

• Following an analyst briefing last Friday, we remain convicted of Yinson’s strong order book prospects and its capability of safely navigating the recent force majeure event for the Ca Rong Do (CRD) project in Vietnam against the backdrop of a territorial dispute with China.

• The group is confident of fully recovering all costs incurred for the project even though the legal ownership for the CRD floating production, offloading and storage (FPSO) vessel is uncertain pending negotiations with financial institutions and the operator Repsol.

• In the worst case, there will be no costs for the group. A possibility is that Yinson could end up with a 49% equity stake in the FPSO which has been fully paid by Repsol and that can be redeployed for other projects at much lower costs and more lucrative returns.

• Yinson’s 4QFY18 core net profit drop of 31% QoQ to RM67mil included non-recurring additional interest costs with the cessation of interest capitalisation for the John Agyekum Kufuor (JAK) FPSO, which achieved first oil 3 months earlier than scheduled in May 2017.

• There were also unexpected repair costs of RM10mil from the group’s 49%-owned Lam Son FPSO, which continues to be deployed on an interim charter at US$50K/day until 31 December 2018 following its termination last year.

• Following the impairment of Lam Son FPSO’s book value by US$209mil, the interim charter rate will be more than the reduced depreciation charges. Hence, we expect a turnaround from 4QFY18 associate loss of RM4mil. Recall that our SOP has already assumed a DCF accretion of RM437mil from an extension of the Lam Son FPSO bareboat charter by assuming another 7 years at a 40% reduced charter rate and an equity discount rate of 6%.

• Management indicated that there are currently 10 FPSO charters from Brazil, Mexico and West Africa which are up for tender. Three of those bids, of which two are large floaters likely to cost over US$1bil, are likely to be awarded by the end of this year.

• Unlike in the past 3 years, there are now significantly fewer operators with the financial capability to handle these projects given the industry downturn. The main players are Modec, SBM Offshore (which has been barred from Brazil due to ongoing bribery charges) and local rival Bumi Armada, which may only be able to manage up to 2 large FPSOs at a time.

• With a healthy order book of US$3.3bil, which represents a comfortable 12x FY18F revenue, the stock currently trades at a bargain CY18F PE of 15x vs. over 20x for Dialog Group.

Source: AmInvest Research - 2 Apr 2018