YINSON’s 1H17 results surpassed our expectations, thanks to its continuous cost management resulting in lower vessel operating expenses. Hence, we increased our FY17-18E earnings by 8-5% to account for that. We continue to like the stock for its steady earnings contribution and the potential of winning new contract in the next 3-6 months. Maintain OUTPEROFRM rating with a higher SoP-driven target price of RM3.92 post earnings adjustment.

Surpassed our expectations. 1H17 core net profit of RM87.1m came above our expectations but within consensus at 58%/51% of the respective full-year estimates. The positive variance was largely due to lower-than-expected vessel operating cost recognized in 2Q17. Our core net profit is adjusted for: (i) RM1.5m profit from the discontinued operations, (ii) RM6.6m unrealised forex loss, (iii) RM1.4m net fair value loss on investment, and (iv) RM1.3m gain on disposal. No dividend was declared as expected.

Steady contribution from FPSOs. Sequentially, 2Q17 core net profit increased by 37% to RM50.3m from RM36.8m in 1Q17 mainly due to: lower vessel operating expenses (i.e. crew cost, repairs and maintenance, consumable store, etc.) On a YoY basis, 2Q17 core net profit also surged by 40% attributable to: (i) stronger performance of USD against MYR, (ii) lower vessel operating expenses, but was offset by higher administrative expenses of RM16.7m from RM3.1m in 2Q16 and 30% higher income tax. Cumulatively, 1H17 core net profit also increased, by 18% YoY in tandem with 16% increase in revenue backed by stronger USD performance and better gross margin of 48% vs 35% in 1H16.

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 on MOPU Marc Lorenceau, which is automatically renewed on a monthly basis. Furthermore, YINSON’s earnings base could be enlarged should the company win the Vietnam’s Ca Rong Do project.

Better margins in sight. We increase our FY17-18E forecasts by 8-5% accounting for lower vessel operating cost resulting in better gross margins. Post earnings adjustment, we still expect earnings growth of 51% in FY17 assuming: (i) 5-month contribution from Yinson Genesis, and (ii) forex assumption of RM4.10/USD.

Maintain OUTPERFORM. SoP-driven TP is revised upward slightly to RM3.92 from RM3.90 previously post earnings adjustment. 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 RM3.77/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 - 29 Sep 2016