Sale of equity stake in YP. Yesterday, YINSON announced that they had entered into a Heads of Agreement on 30 June 2017, with a consortium of Japan incorporated companies for a proposed disposal of 26% equity interest of Yinson Production (West Africa) Pte. Ltd. (YP), an indirect wholly owned subsidiary for a consideration ranging USD104m-117m. Note that YP was awarded the contract of the chartering, maintenance and operation of FPSO John Agyekum Kufuor at Offshore Cape Three Point Block in Ghana, which has produced its first oil on 22 May 2017. Members of the consortium include Sumitomo Corporation, Kawasaki Kisen Kaisha Limited (K Line), JGC Corporation and Development Bank of Japan Inc (DBJ).

Recycling of capital. We believe this is positive to YINSON as it helps to monetise the contract in hand. Based on our estimates, YINSON is estimated to record a one-off gain of USD50-60m. We reckon the cash proceeds received will serve as working capital, equity fund for future projects and also reserves for consistent dividend distribution upon formalisation of dividend policy.

Strategic partnership form. In a longer run, the sale of the stake also marks the maiden partnership between YINSON and these solid Japanese companies. Sumitomo Corporation is a listed conglomerate with diversified businesses while K Line is one of the largest shipping companies in Japan with >500 fleets, including large container ships, bulk carriers, car carriers, crude oil tankers, LPG carriers and LNG carriers. On the other hand, JGC is involved in EPCIC projects specializing in O&G industry and DBJ is a financial institution owned by Government of Japan. In our view, this will strengthen its future bidding if these companies are interested, given their respective specialties in terms of funding, vessels choice as well as EPCC expertise.

Continuation of FPSO Lamson. On a separate note, YINSON also announced that PTSC AP had received a letter of intent from PTSC expressing its intention to continue deploying the FPSO PTSC Lam Son within the Lam Son Field effective from 1 July 2017 for a maximum period of 6 weeks. Pursuant to the acceptance of the LOI, PTSC AP together with PTSC will commence discussion with PVEP regarding a new charter contract. However, the charter rates and final compensation fees have yet to be finalised.

No changes to our earnings given that YINSON has yet to finalise the details for both disposal of equity stake in YP and new contract for FPSO Lamson. Note that the sale transaction is slated for completion by end of 3Q18 and the reduction of 26% in YP would reduce FY18- 19E earnings by 5%-20% assuming only 74% stake to the charter income from FPSO John Agyekum Kufuor.

Maintain OUTPERFORM on the stock with higher SoP-driven TP of RM4.05 from RM3.83 previously as we include 50% of the extension valuation (74% stake) of this contract following the sale transaction which demonstrates the quality and attractiveness of the contract. Besides that, the potential formalisation of dividend policy could be another catalyst to yield seeking investors. Risks to our call include: (i) project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 04 Jul 2017