News  Yinson Bhd announced yesterday that it has been awarded a chartering and operations and maintenance (“O & M”) contract of a FPSO facility by ENI Ghana at the Offshore Cape Three Points Block located in the Tano Basin, c. 60km off the coast of Ghana.

 Firm contract is worth USD2.5b spanning 15 years with another 5 year option worth c. USD0.7b.  Management intends to finance the project with 75:25 debt-equity structure with loan expected to be denominated in USD, forming a natural hedge to its income stream.

Comments  The contract award was not a surprise being widely anticipated by the market earlier. Still, this is a positive for YINSON as securing ENI as a client could potentially open more doors for future contracts not only in Ghana but also globally.

 On top of that, counterparty risk of this contract is deemed low given ENI’s robust balance sheet.  We are also comforted by the favorable contractual terms which cover early termination and purchase option that safeguards YINSON’s CAPEX commitment for the FPSO facility.

 There is also another potential 17.0% upside to the total contract value with cost escalation clauses included to cover OPEX increases.

 Earliest contribution from this project could only be seen in 4Q17 as oil production commences.

 Valuation-wise, we estimate an incremental NPV of RM0.89/share based on IRR of 10.0%. Assumptions made are: (i) 20-year depreciation of vessel, (ii) implied EBIT margins of 47.7-51.8% over the duration of the tenure contract, (iii) loan repayment period of 10 years, and (iv) WACC of 6.2%.

Outlook  YINSON does not expect to secure another major FPSO contract this year to avoid overstressing their balance sheet.

 There is another opportunity for YINSON in Ghana as ENI has also signed an agreement with the government to produce non-associated gas in Gye Nyame field nearby.

 The estimated CAPEX required by YINSON is c. USD120.0-200.0m for this gas production project, but the nature of the potential contract remains uncertain for now pending further discussions with ENI.

 This could be the next positive catalyst to the group, but it could only happen possibly in mid-2016.

Forecast    We increased our FY15/16 NP forecasts by 1.8%/2.8% as we fine tune the associate earnings forecasts.

 There is no inclusion of earnings for the Ghanaian project as commencement of income stream is only by end-CY17 (i.e. FY18).

Rating Upgraded to OUTPERFORM from UNDERPERFORM

Valuation  We revise our valuation methodology from 17.0x CY15 PER-based to SoP-based methodology.

 With the inclusion of the Ghana project, our TP is now RM3.34/share compared to RM2.31 previously, which implies forward FY15/16 PER of 26.8x/23.4x.

 We like YINSON given its secured long-term FPSO contracts which provides recurring cashflow and ability to secure contracts with oil majors amid competitive global FPSO market.

Risks  (i) Higher-than-expected capex requirements could see further rise in gearing.  (ii) Contractual and project execution risks in new projects. 

Source: Kenanga