We returned from YINSON’s analysts’ briefing with a better understanding on the underlying risk of its Floating, Production, Storage and Offloading (FPSO) business. We were guided that all of its FPSO contracts are protected with firm termination clauses whereby clients are bound to pay at least the net present value of the remaining contract value upon termination. Besides, YINSON’s strong clientele profile also reduces counterparty risks, ensuring steady and undisrupted cash flows over the contract period. Currently, the company is focused on ensuring that their largest project, FPSO Yinson Genesis is successfully delivered to client Eni on time. Reiterate OUTPERFORM based on our SoPdriven TP of RM4.04.

Firm termination clauses embedded. Following news that ARMADA (UP; TP: RM0.80)’s FPSO, Armada Claire was terminated by its client, the sustainability of FPSO contracts became a concern among investors. Being one of the industry players, YINSON organised an analysts’ briefing last Friday where we gained further knowledge on its business operating structures as well as insights on the FPSO market. We came to understand that all its FPSO contracts are embedded with termination clauses whereby clients are bound to pay at least the net present value of the remaining contract value upon termination. Therefore, if a FPSO contract were to be terminated, YINSON should receive a lump-sum payment which allows it to pay back its borrowings and also fully own the FPSO.

Project execution is the key during conversion phase. Management emphasised that it is crucial to ensure that the FPSO conversion is done within: (i) expected budget, (ii) time frame, and (iii) client’s technical specifications. Any discrepancies will lead to client rejecting the FPSO and eventually result in project failure. Currently, YINSON’s largest project, Yinson Genesis with an estimated capex of RM1b is undergoing conversion and is expected to achieve first oil by mid CY17. Recall that the FPSO will be operating at Offshore Cape Three Points (OCTP) block, located in the Tano Basin, approximately 60km off the coast of Ghana for 15 years (aggregate contract value amounting to USD2.5b) with an option to extend annually for another 5 years. The group CEO is confident of a successful delivery despite being slightly behind schedule at this juncture given the sufficient buffer time provided.

Strong clientele profile reducing counterparty risk. Once the FPSO is granted the final acceptance from the client, it should generate stable and undisrupted cash flow as long as it is maintaining required uptime unless: (i) client is financially distressed or (ii) the FPSO has to leave the field for major repair and is unable to resume to operating condition for a considerable long period. We believe YINSON has low counterparty risk as the clients are established O&G companies with strong financials with some backed by government-owned oil majors.

Maintain OUTPERFORM. On the same day, YINSON announced that the disposal of Yinson Vietnam Co. Ltd (YVOL) is pending the issuance of the business license and investment certificate from the relevant Vietnamese authority and the agreed cut-off date for fulfilling the conditions has been postponed to 16 May 2016. This will delay the distribution of 15.0 sen special dividend per share to 3QCY16 but still provide a decent yield of 5.4%. All in, we continue to like YINSON for its stable FPSO business amidst volatile crude oil prices environment. While there could be revision on our WACC assumptions and TP pending for the 4Q16 results end of this month, we maintain our OUTPERFORM call on YINSON, based on our SoP-driven TP of RM4.04.

Source: Kenanga Research - 14 Mar 2016