We feel assured with its prospect post a conference call with the management who explained that the termination of FPSO PTSC Lamson will allow YINSON to recoup all its investment and pare down associated debt with the full compensation for the remaining firm contract period. The renegotiation of new contract with PetroVietnam could help to offset the loss of extension option. All in, we lower our FY18-19E earnings by 8- 11% and hence maintain our OUTPERFORM call on the stock with lower SoP-driven TP of RM3.73/share.

How much is the compensation? Yesterday, YINSON held an analysts’ conference call following its announcement of termination notice received by its 49%-owned joint-venture company, PTSC Asia Pacific Pte Ltd (PTSC AP) on the time charter contract for FPSO PTSC Lam Son. 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 and commenced operations in June 2014. Based on our back of envelope calculations, the remaining contract value attributable to YINSON’s 49% stake (for 4-year firm period and 3-year extension is estimated at USD253m (equivalent to RM1.1b). However, the compensation amount is likely to cover only the firm contract period amounting to c.USD145.0m. Despite YINSON yet to finalise the compensation amount, the management is confident that the compensation would be sufficient to cover the cost of investment and repay its associated debt, estimating at USD100-125m (net to YINSON’s stake) and expecting to receive the compensation by August.

Negotiating new contract. With the intention to redeploy FPSO PTSC Lamson, Petrovietnam is currently in the midst of discussing new charter contract with PTSC AP while firming up the compensation amount. As the vessel will be operated in the same field and there is a possibility to tie up the FPSO to other surrounding fields, it is likely that the new contract will have a duration of four years which is similar to the remaining contract period of the existing contract. There are two options on how the new contract could be firmed up; (i) higher compensation fees with lower charter rates on the new contract or (ii) lower compensation fees with higher charter rates. As the FPSO is still operating on site, we believe the client will firm up new contract by end of June after the expiry of existing contract to ensure continuity of the oil production.

Lowered FY18-19E earnings. While YINSON has yet to finalise the arrangement of redeployment of the FPSO with Petrovietnam, we reduced our FY18-19 earnings estimates by 8-11% to RM227.2m and RM296.9m, respectively, assuming: (i) existing contract operates until end of June, and (ii) new contract operating at 50% discount to the existing contract for another four years. Note that the profitability of the new contract will improve should YINSON impair the vessel to reflect the reduction of charter rate, which would lead to lower future depreciation.

Maintain OUTPERFORM. We maintain our OUTPERFORM call on the stock with a lower SoP-driven TP of RM3.73/share from RM3.93/share after: (i) removing the NPV of 3-year extension option of the existing contract, and (ii) including the NPV of c. USD50m for the new contract value with the assumption of four-year contract period and 50% discount to the existing charter rates.

Risks to our call include: (i) project execution risk, and (ii) weaker-than- expected margins.

Source: Kenanga Research - 05 Apr 2017