We returned from a meeting with YINSON feeling reaffirmed with our positive view on the stock premised on its stable and decent cash flow generating business model and potential new contract award in the next 3-6 months. We keep no changes to our forecasts where we expect the maiden contribution from FPSO Yinson Genesis by next year will provide earnings growth of 56%. Special dividend of at least 14.0 sen/share is likely to be firmed up by October. Maintain OUTPERFORM rating with an unchanged SoPdriven target price of RM3.90.

Business remains intact. All its contracted wholly-owned and jointly-owned vessels (FPSO Allan, Adoon, PTSC Lam Son and FSO PTSC Bien Dong 01) are operating well and contributing steady cash flows while YINSON is still collecting management fees of MOPU Marc Lorenceau, which is automatically renewed on a monthly basis. Redeployment opportunity for FPSO Four Rainbow (idle since acquisition in 2015) is not apparent in the next 12 months. Despite FPSO Allan operating in oil field with production of less than 2,000bbl/day making it less economical to produce, the management is confident that the vessel still presents a strong business case to YINSON given its firm termination clauses embedded whereby the client, CNR is bound to pay at least NPV of the remaining contract value up to 2019 upon termination.

New project coming soon? In early July, news reported that the Ca Rong Do project (oil field located at southeast offshore Vietnam) has been reactivated by Respol after hibernating for six months. The proposal first oil date is pushed to 2019 from 3QCY18. It requires a FPSO with processing capacity of 25k-30k bbl of oil per day and 60 million cubic feet per day of natural gas. We gather that YINSON and ARMADA are the finalists for the tender which is likely to be awarded in the next 3-6 months. In short, if we assume: (a) USD500m capex, (b) 10 years firm period, and (c) project IRR of 10%, the potential contract value is worth approximately USD860m. We believe YINSON is likely to joint venture with other parties to avoid further burden to its balance sheet.

New directors on board to strengthen corporate governance. Recently, YINSON board of directors have been reshuffled including three resignations (1 executive director and 2 independent non-executive directors), re-designation of Mr Lim Han Joeh as non-executive director from executive director and appointment of four new directors, namely Dato' Nasir (EPF), Datuk Raja Zaharaton (ex-EPU), Dato' Wee (finance) & Datuk Syed Zaid (legal expert). YINSON is looking to appoint one more director with oil and gas experience to join the board. We are positive on the new appointment as it provides diversified skills and experience to the company.

Yinson Genesis on track. We made no changes to our FY17/FY18E forecast as its Yinson Genesis is slated to sail away in next January and hit first oil by August next year. We expect the maiden contribution from FPSO Yinson Genesis by next year to generate earnings growth of 56% assuming: (i) 5-month contribution from Yinson Genesis, and (ii) forex assumption of RM4.10/USD. YINSON will announce its 2Q17 results next month with earnings expected to be flattish QoQ underpinned by stable performance from its vessels.

Maintain OUTPERFORM. Our SoP-driven TP is maintained at RM3.90 based on SoP valuation model. Note that our ex-TP post distribution of special dividend of at least 14.0 sen/share which is likely to be firmed up by October is RM3.75/share. Meanwhile, based on our ballpark estimates, the Vietnam’s Ca Rong Do project could be worth at least an additional RM0.20/share to our valuation if YINSON secures the job. Risks to our OUTPERFORM call include: (i) project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 25 Aug 2016