We attended an analyst briefing by Yinson Holdings (YINSON) last week where we were provided with further insights on the sale of its 50%-stake in Petroleo Nautipa to co-owners Prosafe Production Public Limited (PPPL) for a cash consideration of USD59.3m (RM189m). Management stressed that it had opted to sell as it deemed a purchase of the remaining 50%-stake as too costly (~>40x PER) for an asset that could only yield a slim IRR as at 2022 (extension period of the contract). They also revealed that the sales proceeds would be channelled to debt repayment (not more than US40m (RM120m; for new bids ;)) and surprisingly also for M&A opportunities (~US19m (RM69m)). We are keeping our FY15-16 net profits forecasts unchanged for now given that management is uncertain about the utilisation of proceeds (amount for borrowings and potential M&As). Hence, we maintain our target price of RM2.31 based on 17x CY15 PER. Whilst we like the company for its ambitious outlook and sound management judgement during its bidding process, we believe that its current valuations are unjustifiably steep for now (a premium to larger peer Bumi Armada, which trades at CY14-15 PER of 19.1-16.2x). Hence, we maintain our Underperform call.

“Buy” decision, deemed too costly. Management shared that a “buy” decision would have resulted in a slim net profit increment of only c.RM4m p.a as it would have to take into consideration: (i) interest costs from borrowings to fund the purchase and (ii) depreciation costs of c.RM8m p.a. for the cost for the asset (being USD20m above the asset cost of USD40m incurred during Yinson’s purchase of FOP). This means the transaction would have translated into a steep PER (above c.40x).

IRR yield of asset uncompelling. The estimated IRR of the project was guided to be low over the firm and extension contract (firm period is up to 2020 and extension period up to 2022) as such was deemed uncompelling given the potential contract extension risks moving ahead. As the company was reluctant to take on the risk, they opted to let go of Petroleo Nautipa.

Paring down borrowings and potential M&As? YINSON is looking to pare down borrowings (not more than USD40m (c.RM126m) which would bring its net gearing down to 0.64x (from existing 0.74x). The remainder will either be channelled to new wins (YINSON guided it is in three active bids in Africa, Vietnam and Malaysia with the African prospect being the best potential win) or surprisingly, M&A prospects. We find the latter option surprising as YINSON had just completed the FOP deal at the beginning of the year. If there’s any M&A it is likely to fill up shortfall in earnings from new projects that could only contribute in CY16.

Keeping our FY15-16 net profit estimates for now. We estimated that FY15-16 net profit would decrease by 2-9.6% (assuming c. USD40m was repaid). However, given that management is still uncertain on proceeds utilisation, we hold off on any changes to our forecasts for now.

Maintain Underperform call. We maintain out TP of RM2.31/share based on 17x CY15 target PER. Given the downside to current share price of 22.5%, we continue to advocate an UNDERPERFORM on the stock.

Trading at valuations over larger and more experienced peers. Whilst we like the company for its ambition and sound management judgement during its bidding process, we believe that its current valuations are unjustifiably steep for now (a premium to larger and more experienced peers like Bumi Armada, which trades at CY14-15 PER of 19.1-16.2x).

Risks to call include higher than expected margins from contracts from existing businesses.

Source: Kenanga