YINSON announced yesterday that they have secured the debt financing for the USD2.5b Ghana FPSO project recently awarded by ENI International BV (ENI). This is positive as it indicates YINSON’s robust free cashflow generation from its FPSO projects amid challenging environment. It is believed to be also pursuing for the offshore unit job in the same oilfield with a smaller potential CAPEX of USD200.0m which could be awarded in end-2016. This is related to the gas sales agreement between ENI and Ghana government to supply power from 2018 to 2036. The company does not intend to take on another FPSO project this year to ensure good execution on the conversion period for its Ghana project. We have increased our SoP-driven TP to RM3.81 from RM3.34 previously as we have included the OPEX revenue and cash advance payment to be received in our DCF valuation. Maintain OUTPERFORM call on the stock. We continue to like the company for its: (i) its predictable future cash flow stream due to long term nature of FPSO contract, (ii) relationship with ENI which open doors for future offshore projects globally, and (iii) strong contract negotiation ability.

Debt financing secured for Ghana project. Yesterday, YINSON announced that they have secured debt financing (USD780.0m term loan facility) for its recently awarded Ghana FPSO project. This is positive as it showcases YINSON’s ability to generate cashflows for loan repayment even amid the O & G industry downturn. We believe that the drawdown for the loan facility will be in conjunction with the timing of CAPEX for the project, expected to be over the next 3 years. To recap, YINSON has been awarded a contract by ENI with firm contract value worth USD2.5b. The FPSO facility will be stationed at Sankofa-Gye Nyame field located in the Tano Basin, c.60 km off the coast of Ghana. This is a deep-water oil field with 500m barrels of exploitable oil and 1.45t cubic feet of non-associated gas in place.

Eyeing non associated gas job in Sankofa field. ENI has secured a gas sales agreement with the Ghana government to supply non associated gas from the Sankofa field to the country’s thermal power system from 2018 to 2036. YINSON is also believed be pursuing the job which requires an offshore unit to support the gas production. This, we believe, could further lift YINSON’s long-term earnings and DCF in the event of it winning the job. However, discussions are still at preliminary stage at the moment but we gather that the CAPEX for the project could amount to c.USD200.0m, which is smaller in size relative to the FPSO project it secured last month.

Focus on project execution now; looking a secure mid-size FPSO job in end 2016. The company has made clear its strategy to focus on execution of the initial FPSO conversion phase of FPSO Ghana project in the coming two years to maintain their service quality for their client. Aside from the potential non-associated gas project in Sankofa field, the group intends to secure another mid-size FPSO project end-2016. We opine that the CAPEX of the potential FPSO project could be in the region of USD700-800m in comparison to the USD950-1000m expected CAPEX for the Ghana job. Should they secure the next FPSO job, we believe a private placement in 2H16 is potentially likely to fund the potential 30.0% (assuming 30:70 debt-to-equity ratio) equity portion of the project’s CAPEX which amounts to c.USD210-240m.

More on Ghana FPSO project. Previously, we were too conservative on our DCF valuation on Ghana FPSO project which excluded the OPEX revenue portion (c.USD30-40m p.a.) and USD106.0m cash advance this year. After including the two items, our Ghana DCF valuation has increased from RM929.0m to RM1,242.0m. Our DCF valuation is based on 11.0% IRR with EBITDA margin of 75.0%, in line with other FPSO projects with EBITDA margins (75- 85%). Post-adjustment, our SOP-derived TP has increased to RM3.81 (+20.1%) from RM3.34 previously with other segmental valuations maintained. If EBITDA margin of 80.0% is achieved due to better cost management, our TP will be lifted to RM4.06.

Maintain OUTPERFORM on long-term growth story. We maintain our OUTPERFORM call on the stock post our upward revision in SoP-derived TP. We continue to like the stock for: (i) its defensive FPSO business model with firm contract tenures spanning 5-15 years, (ii) strong negotiation ability which is critical for getting favourable contractual terms for FPSO jobs, and (iii) relationship with Italian oil major, ENI, which YINSON could capitalize on in the long-term for future upcoming projects. In addition, we are also comforted by the fact that there are clauses in the FPSO contract which safeguards the contract’s NPV in the event of a force majeure, eliminating contract termination risk.

Risks to our view. (i) Execution risk for FPSO jobs on hand, (ii) extensions on existing contracts not exercised, and (iii) natural disaster which may impair the operations of the FPSO.

Source: Kenanga