News     Yesterday, YINSON announced that it has entered into a transaction agreement with Fred. Olsen Production (“FOP”) to acquire all shares at a price-tag of NOK9.40/share (c.RM5.20/share) or NOK995.74m (c. RM551.34m). YINSON hopes to complete the acquisition by Nov-13.

It also announced it has reduced the proposed share issuance to Kencana Capital (“KCSB”) to 37.8m (from previous estimated 38.9m shares) at an unchanged price of RM2.82/share. This raises RM106.6m cash which will  be utilised as part of the FOP acquisition. 

Comments    We are pleasantly surprised by the acquisition as it is a sizable undertaking for YINSON. We deem it an attractive buy given that it was translates to a price-to-book valuation of 0.7x; a discount to Norwegian peers (i.e. Sevan  Marine and BW Offshore) forward P/BV of 1.1x and the 2.5x CY14 P/BV level that its nearest Malaysian comparison- Bumi Armada (“ARMADA”; NOT RATED) is currently trading at. On a PER basis, it translates to 10.4x of management’s net profit projection of RM50m for Jan FYE15 for FOP in-line with peers’ CY14 PER of 10.1x. 

FOP owns and operates three 3 FPSO vessels (one of which is 50%-owned) and manages a MOPU on behalf of a client. The acquisition raises YINSON’s floating production fleet size to 5 units (from the 2 units); just below Bumi Armada’s floating production fleet of 6. More importantly these FPSOs come with long-term contracts that have firm and option periods that run till 2022-2029.

Based on Bloomberg, we note that FOP had previously made net losses. However, management guides they were mainly due to non-recurrent write-downs.

Outlook    We believe this purchase will lift: 1) YINSON’s capabilities as an FPSO player given it will be inheriting a seasoned international management; and 2) geographical presence as FOP’s FPSOs are in currently in Nigeria and Gabon.

The company is also targeting charter rate upsides; as one contract is up for renewal by 2014 and management believes the redeployment at market prices to be possible.

Forecast    We have fine-tuned our USD:MYR rate to RM3.10 (from RM3.15) and raised our net debt to account for higher capex spend by FY15 as the company seems to be on an expansionary mode.

For now, we are valuing the FOP acquisition on a P/BV basis of 1.5x to CY14 BV, net of the RM400m debts raised for the acquisition. Our P/BV basis of 1.5x is the average  of CY14 P/BV for the Norwegian FPSO peer companies and Bumi Armada, which has FPSOs in Africa as well.

We look to fine-tune our earnings for the FOP acquisition after further discussions with management, but earnings are tweaked slightly lower by 2% and 1.8% due to lower interest savings with the lower number of shares raised during the share issuance to KCSB.

Rating  Maintain OUTPERFORM

Valuation     Due to the changes, we have raised our FY15 SOP-based contractual and project execution risks in new projects due inexperience.

Risks    1) High capex requirements brings gearing up; and 2) target price to RM5.73 (from RM3.78 previously). 

Source: Kenanga