- We initiate our coverage of Yinson Holdings (Yinson) with a BUY recommendation and a fair value of RM10.30/share, based on sum-of-parts (SOP) valuation, which implies a FY15F PE of 23x and EV/EBITD (Enterprise Value/Earnings Before Interest, Tax & Depreciation) of 14x – comparable with our current valuations for Bumi Armada.

- Our SOP assumes that the 49%-owned Lam Son floating production, storage and offloading (FPSO) vessel’s conversion costs will increase by 10% to US$440mil. Post-rights of RM500mil and 1-to-2 share split, our fair value will drop to RM4.08/share.

- After the game-changing acquisition of Fred Olsen Production (FOP), Yinson has emerged with a global footprint as a service provider for floating solutions to the oil & gas industry with a stable of 5 FPSO and floating storage and offloading (FSO) vessels (in operation or under conversion), ranking just behind BumiArmada.

- The valuation drivers for Yinson stems from its:- (1) strong business connections in Vietnam which offers first right of refusal from PetroVietnam Technical Services Corp to participate in the country’s pipeline of multiple oil & gas projects; and (2) elevated profile in international tenders given the group’s enlarged floater assets and FOP’s strong established track record.

- The group is poised to secure 2 significant projects in 2H2014 which should further drive Yinson’s re-rating prospects further. The first involves a 49% stake in the charter for the US$150mil Ham Rong FSO in Vietnam, besides at least 4 other floater projects in the country, that are in the pipeline.

- The second and more important contract is the much larger US$700mil-US$800mil Offshore Cape Three Points (OCTP) FPSO off Ghana in which Yinson is the leading contender, having leveraged on FOP’s established presence in West Africa. Besides overseas contracts, Yinson could also emerge in Malaysia’s domestic oil & gas plays if Yinson’s associate could secure a licence from Petronas.

- We are projecting Yinson’s FY14F-FY15F earnings to accelerate by 81%-85%, driven by its associate stakes in the FSO Bien Bong 01 and FPSO Lam Son together with its earnings-enhancing acquisition of FOP. These does not include contributions from the upcoming Ham Rong FSO and OCTP FPSO contracts given that Yinson only accounts for earnings upon commencement of vessel operations.

- The group’s high net gearing of 1.9x as at end-FY14F currently stems from the acquisition of FOP, which was partly alleviated by the placement of 38mil new shares to Kencana Capital. But the proposed renounceable rights issue of RM500mil, which is scheduled for completion in 2Q2014, will lead to a drop in Yinson’s FY14F net gearing to a more comfortable 0.6x (comparable to Bumi Armada’s 0.7x) which should position the group’s balance sheet for fresh impending projects.

- Yinson’s share price has outpaced the FBMKLCI by 2.6x over the past month. But valuations are still decent at FY15F PE of 20x, just slightly ahead of Bumi Armada’s 18x. Also, Yinson’s FY15F EV/EBITD works out to 12x, almost at parity to Bumi Armada.

Source: AmeSecurities