The termination of FPSO PTSC Lamson should allow YINSON to recoup all its investment and pare down associated debt assuming it receives full compensation. Following that, a renegotiation of new contract with PetroVietnam could provide additional upside for YINSON to create additional income on a debt-free vessel. All in, while keeping earnings estimate pending a conference call today, we maintain OUTPERFORM call on the stock with unchanged SoP-driven TP of RM3.93/share.

Termination notice from PTSC. Yesterday, YINSON announced that its 49%-owned joint-venture company, PTSC Asia Pacific Pte Ltd (PTSC AP) with remaining stake owned by PetroVietnam Technical Services Corporation (PTSC) has received a letter from its charterer, PTSC stating that the Lam Son Joint Operating Company (LSJOC), the operator of Lam Son Field had issued a notice of termination to PTSC under the time charter contract for FPSO PTSC Lam Son dated 24 May 2012 entered by LSJOC and PTSC. The service of such notice of termination is pursuant to the liquidation of LSJOC, which is scheduled to occur on 30 June 2017. Note that LSJOC is jointly owned by PetroVietnam Exploration Production Corporation (a wholly owned subsidiary of Petrovietnam) and PC Vietnam Limited, a wholly owned subsidiary of Petroliam Nasional Berhad.

Entitled to an early termination payment. We were not entirely surprised by the termination announcement as such risk has been highlighted by the management in the analysts? briefing last Friday. In the case of such termination, PTSC AP is entitled to an early termination payment from PTSC subject to the terms of the contract. Meanwhile, despite the liquidation of LSJOC, Petrovietnam has the intention to utilise FPSO PTSC Lam Son for the petroleum operations at Lam Son Field. While the quantum of termination has yet to be finalized at this juncture, we believe the termination might not be entirely negative to YINSON. Note that YINSON has invested close to USD50m in this joint-venture. We believe that the termination compensation received would allow YINSON to recoup all its cost of investment and repay its debt associated to the project (estimated at c. USD100m).

FPSO continued to be redeployed? The fact that Petrovietnam has stated its intention to continue utilising the same FPSO within the same field suggests that FPSO PTSC Lamson has high chances of being redeployed. This probably means that there might be a new contract being formed between TSC AP and Petrovietnam. Recall that PTSC AP secured the contract amounting to USD737.3m in 2012 for 7 years with a yearly extension option for another 3 years. Based on our back of envelope calculations, the remaining contract value attributable to YINSON?s 49% stake (for 4 year firm period and three-year extension is estimated at USD253m (equivalent to RM1.1b). FPSO PTSC Lam Son produced its first oil in June 2014.

Maintaining earnings for now. While YINSON has yet to finalise the arrangement of redeployment of the FPSO with Petrovietnam, we are maintaining our earnings estimates pending a conference call today. Take note that removal of FPSO PTSC Lamson earnings assuming 90 days notice period will result in 8%/13% downgrade in FY18E/FY19E earnings estimates.

Maintain OUTPERFORM. We maintain our OUTPERFORM call on the stock with an unchanged SoP-driven TP of RM3.93/share which implies forward FY18-19E PER of 17.3-12.9x as we believe YINSON is able to recoup at least all the NPV of the remaining contract value. Note that termination of Lamson contract without compensation would reduce our SoP by RM0.92/share or 23% of our TP. Risks to our call include: (i) project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 04 Apr 2017