News  Yinson Bhd announced yesterday that it has decided to dispose its stake in FPSO Petroleo Nautipa for a cash consideration of USD59.3m (RM187.98m).

 The sale translates into a gain of RM78.7m (based on a tentative purchase price of RM109.3m that is still subject to finalisation of a purchase price allocation).

 The disposal is expected to be completed by 3Q14 and is conditional upon the satisfaction or waiver of the following: (i) approval from the shareholders of YINSON and (ii) the warranties in the sales and purchase agreement (S&P) remaining true and accurate and not misleading in any respect as at the completion date.

Comments  We believe the disposal is a fair transaction given: (i) a gain of c.RM78.70m and (ii) the deal was transacted at a PER of at least c.9x (based on an estimated associate contribution of RM20.8m in FY15-16).

 However, there will be a short-term earnings decrease in net profit (we estimate that Petroleo Nautipa contributes a significant 11.3-10.4% of YINSON’s FY15-16 PBT)

Outlook  YINSON has yet to determine the utilisation of the proceeds from the disposal, but we believe that it will be plowed into any upcoming FPSO wins and help to stave off the need for additional borrowings.

 Market talk has 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.

Forecast  We maintain our earnings estimates for now pending feedback from its upcoming analyst briefing today.

Rating Maintain UNDERPERFORM

Valuation  We maintain our target price of RM2.31 based on CY15 EPS of 13.6 sen and unchanged PER of 17x.

 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 19.2-16.4x.

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

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

Source: RHB