Period  1Q15

Actual vs. Expectations YINSON’s 1Q15 core net profit of RM23.7m made up 18.3% of our full-year estimates (RM128.6m) and 19.6% of market consensus (RM120.8m).

 Our 1Q15 core net profit forecast is adjusted for: (i) the exclusion of a bonus payment of RM15m from Lam Son thanks to early delivery of the FPSO which hit first oil in Jun-14 and (ii) the inclusion of unrealised forex losses of RM5.4m and expenses of c.RM3m that was incurred for ongoing tender bids that could be recouped subsequently.

 We deem the earnings as slightly below expectations as we were too aggressive on margins assumptions for the transport, trading and others divisions that saw slightly sluggish growth this quarter.

Dividends  No dividends were declared for the quarter.

Key Results Highlights QoQ, 1Q15 core net profit rose by 27.3% (from RM18.6m in 4Q14) mainly due to the inclusion of FOP earnings which lifted the operating profit of its marine division (+126% from RM9.9m in 4Q14) and the core JV earnings to c.RM14m (ex-bonus of RM15.2m for Lam Son FPSO mentioned above) from the RM8.9m recorded in 4Q14.

 YoY, 1Q15 core net profit was 63.6% higher mainly due to the inclusion of Yinson’s FSO Bien Dong and FOP earnings.

Outlook  YINSON has just completed a rights issuance and share split exercise, which raised RM568m which increased its share base to 1.03b (from 258.6m previously).

 Market talk had it that YINSON is bidding for at least three projects and management guided that any new wins would likely be after 1HCY14.

 We believe the market has factored in at least one contract win, judging from the sharp jump in its share prices in the past week (+9.2%), but any new project would only yield earnings by end FY16-17 (due to a construction period of 18-24 months).

 There are plans to divest the non-oil and gas divisions, but this might only occur from next year onwards.

Change to Forecasts We have fine-tuned our FY15-16 net profit forecasts for: (i) lower revenue growth and margins in the trading and transport divisions and reclassified c.RM20m from the marine division to the JV line to better reflect Petroleo Nautipa’s earnings (one of FOP’s 50% JV subsidiary) and (ii) lower interest costs to reflect the interest savings from the rights issuance as we were too aggressive on FY16 interest costs.

 Our changes resulted in minimal -1.5% and -2.7% changes to FY15-16E estimates.

Rating Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation  Whilst we like YINSON for its long-term contracts and also sound management judgement in making bids, we believe that the market has priced-in at least 1-2 contract wins, which would contribute only from CY16. Moreover, the stock is now trading at a steep premium to its larger peer Bumi Armada, which trades at CY14-15 PER of 19.1-16.2x.

 Based on CY15 EPS of 13.6 sen and unchanged PER of 17x, our new target price is RM2.31 (from RM2.50 we had initially expected the new fair value to be).

 Our new PER is 2x higher than other small cap peers to credit YINSON’s ability in winning contracts and the tight share liquidity.

Risks to Our Call (i) Higher-than-expected capex requirements could see further rise in gearing.

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

Source: Kenanga