YINSON’s 9M17 results beat expectations, thanks to lower- than-expected finance cost. We continue to like the stock for its steady earnings contribution and potential of winning new contracts over the next 3-6 months as well as being the beneficiary of a stronger USD. Reiterate OUTPERFORM call with a lower SoP-driven target price of RM3.79 post completion of divestment exercise and distribution of special dividend of 14.6 sen/share despite earnings upgrade of 12%-3% for FY17- 18E.

Surpassed expectations. 9M17 core net profit of RM138.1m came above consensus forecast and ours at 85%/82% of the respective full-year estimates. The positive variance was largely due to lower-than-expected finance cost. Our core net profit is adjusted for: (i) RM2.3m profit from the discontinued operations, (ii) RM12.2m unrealised forex gain, (iii) RM1.6m net fair value loss on investment, and (iv) RM3.5m loss on disposal. No dividend was declared as expected.

Flattish QoQ earnings performance. Sequentially, 3Q17 core net profit inched up slightly by 1% to RM50.8m from RM50.5m in 2Q17, in tandem with 12% QoQ stronger topline arising from higher FPSO shipping services and OSV businesses but was offset by higher operating vessel cost, evident by a decrease in gross margin to 48% from 54% last quarter. On a YoY basis, 3Q17 core net profit increased by 7% attributable to: (i) stronger performance of USD against MYR, (ii) 42% lower finance cost, and (iii) better operating efficiency masking the 64% higher tax expense.

Cumulatively, 9M17 core net profit also surged by 14% YoY to RM138.1m in tandem with a 16% increase in revenue backed by stronger USD performance (average rate of RM4.0659/USD in 9M17 vs RM3.8541/USD in 9M16) as well as higher contribution from FPSO segment arising from additional revenue from shipping services and variation orders. Meanwhile, gross profit margin improved by 18% to 48% in 9M17 due to lower vessel operating expenses.

Eyeing new contracts. All its contracted wholly-owned and jointly-owned vessels (FPSO Allan, Adoon, PTSC Lam Son and FSO PTSC Bien Dong 01) are operating at 100% uptime in 3Q17 and contributing steady cash flows whilst YINSON is still collecting management fees on MOPU Marc Lorenceau, which is automatically renewed on a monthly basis. On the other hand, YINSON is also eyeing new projects in Vietnam, Ghana and Nigeria.

Higher earnings forecast. We increase our FY17-18E forecasts by 12%- 3% accounting for lower finance cost. Post earnings adjustment, we still expect earnings growth of 38% in FY17 assuming; (i) 5-month contribution from Yinson Genesis, and (ii) forex assumption of RM4.10/USD.

Maintain OUTPERFORM. Post the completion of divestment exercise and distribution of special dividend of 14.6 sen/share and earnings adjustment, our ex-TP is lowered to RM3.79/share from RM3.92/share previously. 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 - 21 Dec 2016