We came away from its 4Q15 briefing feeling more reassured on our positive view on the stock. Key takeaways were: (i) Knock Adoon and Knock Allen’s contract risks are low given favourable contract terms, (ii) 6-7 OSV vessels, which require potential CAPEX of USD100- 150.0m could be added to its existing fleet to complement its core FPSO business, (iii) FPSO Ghana project is on track with 40% of topside contract awarded to subcontractors while potential savings on CAPEX could be realised in the wake of lower oil prices. We have tweaked our FY16 core net profit forecast upwards by 2.6% due to housekeeping and introduced FY17E net profit of RM148.7m based on similar earnings assumptions for its existing business divisions. Contribution from FPSO Ghana has yet to be factored in as it is expected to only kick in late 2017. SoP-driven TP revised slightly (+1.3%) to RM3.86 from RM3.81 previously with OUTPERFORM call maintained.

Sale of Petroleo Nautipa a bonus. Earlier in mid-2014, YINSON has sold the FPSO for a total consideration of USD59.3m for a significant gain of c.RM70.0m. It is indicated that the deal made sense for the company as the FPSO is ageing at 40 years old with an unattractive project IRR. We believe it is a good deal as it is unusual for an old asset with relatively low returns to fetch such favourable pricing. This has helped to free up more cash in its balance sheet to fund its equity portion of the upcoming Ghana project.

More on Knock Adoon’s extension options to be exercised. Firm contract period for Knock Adoon, which is part of the FPSO asset portfolio in YPAS acquired last year, has ended and it is now running on its 8-year extension options. Concerns on non-extensions and downward revision of rates are allayed as management has indicated that the African field it is currently working on is still producing 50,000 bbls of oil a day. Instead of rate cuts, we believe Sinopec, the operator of the field would be compelled to exercise the purchase option of the contract instead to take ownership of Knock Adoon as the field is expected to be productive for a further 15 years. This will be positive to YINSON as it will provide huge cash flow boost for the company to be redeployed on higherreturn projects. However, in light of budget cuts by oil majors worldwide, the purchase option could not be exercised for 2015.

Knock Allen contract termination risks low. Picture is not as rosy for Knock Allen as it is now operating in a non-performing oilfield with production estimated at c.1,000bbl/day. Notwithstanding, we took comfort that it is still running on its remaining 4.2 year firm contract with termination fees higher than FPSO cost, which is not economically feasible for the client to do so at current oil prices. Therefore, we opine that the contract termination risk of the project remains low at the moment and it will continue to provide recurring cash flows to the group in the mediumterm.

Could add 6-7 OSV vessels. Management has indicated that it could spend another USD100- 150.0m to purchase 6-7 OSV vessels to gain presence in the Vietnam and African waters to complement its current FPSO business. While additional earnings contributions are expected to be insignificant on an overall basis, we believe the move is necessary to keep YINSON closer with its existing clients while, on the other hand, it could potentially open doors to more opportunities for their core business. We have not factored in any incremental contribution from the addition of OSV vessels as it is indicated that the acquisition of vessels will only proceed if firm contracts are secured.

FPSO Ghana. Progression on the conversion for FPSO Ghana appears to be on track with c. 40.0% of the topside works already awarded to subcontractors. The plunge in crude oil price has resulted in potential cost savings (potentially c.USD50.0m) on YINSON’s CAPEX for Ghana FPSO (USD1.0b initial costs). On top of that, the later-than-expected contract award has also provided more time for it to understand the required specifications of the FPSO vessel well, thereby lowering risks of cost overruns of the projects. Despite the positive development, we have decided to maintain our USD1.0b CAPEX assumption for the Ghanaian project to remain conservative on our DCF valuation. While net gearing of the group could increase to 2.0x assuming full drawdown of loan for the project, it is still below its maximum tolerable gearing of 2.5x but the company may raise equity financing to create greater headroom for future projects. However, for 2015, equity fund-raising is not necessary yet as the full drawdown of loan is expected to be at end 2016 the earliest.

Maintain OUTPERFORM. We have tweaked our FY16 net profit forecast to RM149.2m (+2.6%) due to housekeeping reasons. FY17 net profit forecast of RM148.7m is introduced as well with assumptions of : (I) similar earnings contribution from its existing FPSO projects (PPSO Lam Son, FSO Bien Dong, Knock Adoon & Knock Allen, and (ii) flat earnings contribution from its logistics and trading division. Maiden earnings from FPSO Ghana could only be felt in FY18 according to the targeted commencement date. As a result of housekeeping, our SoP-driven TP is tweaked upwards by 1.3% to RM3.86 from RM3.81 previously. We reiterate our OUTPERFORM call on the stock as we continue to like the stock for its concession-like FPSO business model with fairly predictable long-term cash flow streams.

Risks to Our Call. (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