- We upgrade Yinson Holdings (Yinson) to a BUY with a higher fair value of RM3.60/share (from RM2.85/share previously), based on our sum-of-parts (SOP) valuation. Our fair value implies an FY16F’s (ending Jan) PE of 25x, a premium above the O&G industry average of 17x. We deem this justifiable due to the strong counterparties for their FPSOs and the potential for earnings to double upon the commencement of the OCTP FPSO in Ghana.

- Following a recent meeting with management, we raised our valuation of OCTP as we have imputed a higher IRR of 12.5% as guided by management, vs. our previous assumption of 10%. The OCTP project currently accounts for 48% of our total SOP valuation.

- Upon the commencement of operations in September 2017, the FPSO is expected to contribute to the bottom line significantly, with approximately RM150mil full-year accretion to bottomline. We have accounted for four months contribution from the project for FY18F. FY19F earnings should double that of FY15F, although this is not currently within our forecast horizon.

- We are taking a more constructive stance on the OCTP contract. We understand that the execution and counterparty risks appear somewhat low given that its customer, Eni SpA, is one of the largest integrated energy companies in the world with a market capitalisation of EUR61bil and a healthy balance sheet (net gearing of 0.3x).

- Furthermore, Yinson does not bear the risk of lower crude oil prices potentially causing the production from the FPSO to be economically unfeasible. This is because Yinson is well protected by the contract terms between the two parties where the early termination fees would preserve its net present value currently derived from the project.

- With a 75:25 debt:equity funding for the project, the group’s net gearing is expected to increase from 0.32x currently to >2x over the next 2-3 years. This would be progressively offset by the strong earnings and cash flows generated from the FPSOs. Yinson’s plan to divest its non-O&G operations (valued at RM273mil) by this year, would further help pare down its gearing levels.

- Meanwhile, we understand that Yinson is actively bidding for more FPSO contracts. One such contract is the Ca Rong Do project in Vietnam by Talisman (now Repsol), according to Upstream. The FPSO will have a production capacity of between 25k barrels per day (bpd) of oil and 30k bpd, plus 60 mmscfd of gas, with first production targeted in 2QCY18.

- The stock currently trades at an FY16F PE of 21x. The entry of Kencana Capital as the second largest shareholder should continue to underpin the sentiment of the stock, given its excellent track record in growing Kencana Petroleum (subsequently SapuraKencana) into one of the largest O&G service providers in Malaysia.

Source: AmeSecurities Research - 18 May 2015