News  Last week, Yinson Holdings (YINSON) announced the following proposals; (i) a rights issue to raise maximum gross proceeds of up to RM500m, (ii) an increase in authorised share capital from RM500m to RM1b, and (iii) a 1-to-2 share split post the rights issuance.

 The entitlement basis and the issue price for the proposed rights issue have not been fixed at this juncture to offer flexibility to the Board with regards to pricing, but YINSON mentioned it intends to fix the issue price at a discount of at least 30% from the theoretical ex-rights price (TERP) based on the five (5)-day VWAP immediately preceding the price-fixing date.

Comments  The proposed fund raising exercises are to strengthen YINSON’s group position, reduce gearing levels and repay advances made by major shareholders (Mr Lim Han Weng and parties related to him). The share split is to enhance YINSON’s stock trading liquidity.

 Assuming the illustration by YINSON, the proposed rights issuance and share split could (i) lift its share base by 774.6m shares (3x current share base) to 1.03b shares (from 258.2m shares currently), (ii) result in an EPS dilution of 72.2-73.6%, and (iii) reduce net gearing to 1.03x (from 2.47x post the FOP acquisition).

 Overall, we are not surprised with by the exercise as we earlier believed the company was looking to pare down debts, especially if it still intends to continue looking for new projects to fuel earnings growth. We also believe that shareholders will subscribe to the rights issue given that it is priced at a steep discount to TERP.

Outlook  YINSON’s floating production operations will continue to have a strong presence in Vietnam, and now boosted by the FOP fleet, it will have an enhanced geographical presence.

Forecast  We maintain our earnings forecasts for now pending the completion of the corporate exercises.

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)

Valuation  We are downgrading our call on the stock given that near-term catalysts are already priced-in at this juncture, in our view. Having said that, we are inclined to change our view should there be more incoming projects post the corporate exercise.

 Our target price of RM7.32 is based on a targeted FY15 PER of 15x. Our PER is based on a c.18% discount to the current trading CY14 PER of 18.4x for Bumi Armada (Yinson’s closest peer) as YINSON is relatively (i) smaller in market capitalisation size and (ii) new in the floating asset market.

Risks  (i) Higher-than-expected capex requirements could see further increase in gearing.

 (ii) Contractual and project execution risks in new projects causing earnings disappointment.

Source: Kenanga