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.

• We remain positive on Yinson entering into a novation agreement with JX Nippon Oil & Gas Exploration (Malaysia) Ltd and TH Heavy Engineering (THHE), which allows the company to take over the 100% equity stake in its maiden floating production storage and offloading (FPSO) charter in Malaysia. This is for the US$860mil (RM3.4bil) bareboat charter for Layang gas field in Block SK10 off Sarawak, which has a firm period of 8 years with 10 annual extensions.

• Recall that Yinson will be paying RM374mil cash for the novation as JX Nippon had earlier awarded the contract to THHE in May 2014 with a firm contract value of US$372mil for 8 years and optional value of US$457mil for 10 years. We understand that the new charter value has increased slightly by 4% due to forex changes since the earlier award.

• THHE has not been able to contractually hand over the FPSO on 30 June 2016 due to its financial distress. THHE had earlier envisioned deploying its Deep Producer FPSO, which was acquired at a cost of US$82.5mil in October 2011, that required conversion costs of US$244mil. However, Yinson will be deploying its currently idle Four Rainbow FPSO, acquired at a cost of US$44mil, which is more suited for the field’s specifications.

• Together with conversion costs of likely below US$200mil, our assumption of an all-in capex of US$350mil for the Layang FPSO is achievable, vs. management’s guidance of US$350milUS$400mil. Hence, we maintain the Layang FPSO’s NPV of RM395mil, 8% of Yinson’s unchanged SOP. Given Yinson’s track record, there is a possibility that Yinson may yet secure the operation and maintenance contract, which could support our unchanged project IRR assumption of 12%.

• 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 is now significantly lower number of 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, who may only be able to manage up to 2 large FPSOs at a time.

• Yinson remains a strong contender for a Hess-related FPSO project in Ghana, which could cost over US$1bil, similar to the group's earlier vessel for Eni. Recall that Hess' Tano-Cape Three Points off Ghana won a territorial dispute with the Ivory Coast, as mediated by the International Tribunal of the Law of the Sea last year. 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 14x vs. over 20x for Dialog Group.

Source: AmInvest Research - 2 May 2018