News

Yesterday, YINSON announced that Yinson Heather Ltd (YHL), a whollyowned subsidiary, has entered into a Joint Venture Deed (JVD) with Four Vanguard Servicos E Navagacau LDA (FVSN), a wholly-owned subsidiary of Premuda S.P.A. (PREMUDA) to establish a Joint Venture Company (JVC) for the purposes of acquiring an FPSO vessel owned by FVSN, which will be used for bidding small-sized FPSO jobs.

The newly established JVC will then purchase the vessel from FVSN for a total consideration of EUR60m backed by: (i) EUR20.4m cash, (ii) EUR19.6m worth of JVC shares, and (iii) EUR20m convertible note to be issued.

From YINSON’s perspective, it shall subscribe to 51% equity stake in the JV comprising of 20.4m shares worth EUR20.4m.

Comments

We were surprised by the announcement as we do not expect any major deal by the company for the next 2 years as it focuses on the conversion of its existing FPSO Ghana.

Notwithstanding, we feel positive on the potential deal as it gives the group further exposure in the FPSO business with a lower entry cost.

In addition, it also has a call option to buy out FVSN’s interest in the JVC for EUR39.6m from date of completion of the deal to 31st Dec 2017 if everything goes well. On the flipside, FVSN also possesses the right to exercise its put option to sell its JVC stake to YINSON at EUR24.6m. The put option is only applicable when: (i) the JVC manages to secure an FPSO job prior to 31st Dec 2017, and (ii) the contract is not terminated for 90 days after the contract is awarded, minimizing YINSON’s downside.

Furthermore, the EUR20m convertible note would be convertible if: (i) an FPSO contract is secured, (ii) absence of contract at 31st Dec 2017, (iii) exercise of call option. Upon conversion, shares converted will be distributed according to the group’s shareholding percentage in the JVC, thereby avoiding dilution in shareholding. However, the group will be obliged to pay EUR10m to FVSN upon conversion of the note.

All in, the group’s maximum cost to own 100% of the JVC amounts to EUR67.3m (RM281.9m based on EUR/MYR FOREX rate of 4.1893), which is manageable considering its RM364.4m cash pile as of FY15. Its gearing would be increased by 0.1x to 0.4x from 0.3x (post private placement) assuming full debt financing.

Assuming a job is won, the group’s minimum cost could be EUR30.4m (RM127.4m) if it decides to maintain the JV structure coupled with FVSN’s intention to remain invested in the JV.

In the event of a FPSO job win, it will take a year for redeployment and modification. Therefore, we expect earnings contribution to come in earliest in 2017 if they manage to secure a job this year. We reckon the job would be significantly smaller in size compared to FPSO Ghana as Four Rainbow, the vessel to be injected into the JVC, has a storage capacity of 604,000bbl vs. 1,700,000bbl of FPSO Ghana.

As the Ghana, CAPEX is at c. USD1b, our on the back of the envelope calculation suggested that the fair CAPEX for Four Rainbow is USD355m, which is still lower than YINSON’s total cost of acquiring 100% of the FPSO and redeployment cost of USD274.2m, suggesting fair cost of entry for the group.

Outlook

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

There is a potential 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.USD120m-200m for the gas producing 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 be awarded possibly in mid-2016.

Forecast

We maintain our forecast for now

Rating

Maintain OUTPERFORM

Valuation

Our SoP valuation is maintained at RM3.89.

Risks to Our Call

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

Source: Kenanga Research - 31 Jul 2015