With no surprises in 1H18, YINSON continued to deliver stable earnings backed by long-term contracts. Meanwhile, we believe the sale of its 26% stake in FPSO John Agyekum Kufuor (JAK) will help to monetise the good quality contract in hand and augment its war chest for the future. Pending the completion of the disposal, we maintain our earnings estimates and reiterate our OUTPERFORM call on the stock with unchanged SoP-driven TP of RM4.05/share.

Deemed within expectations. At 62%/71% of our/consensus full-year estimates, 1H18 core net profit of RM186.7m is deemed within expectations as we are expecting a weaker 2H18 in the absence of additional revenue from shipping services and variation orders. Our core net profit is adjusted for: (i) RM21.9m unrealised forex loss, (ii) RM17.7m impairment loss on PPE, (iii) RM2.9m FV loss on investment properties, and (iv) RM1.6m impairment loss on receivables. Interim dividend of 4.0 sen/share was declared, above our expectations.

Stronger QoQ earnings performance. Sequentially, 2Q18 core net profit increased by 41% to RM109.3m from RM77.4m in tandem with 26% QoQ higher top-line arising from maiden earnings contribution from FPSO JAK which hit first oil end of May as well as lower administrative expenses (-6% QoQ). On a YoY basis, 2Q18 core net profit jumped by 78% YoY from RM61.6m in 2Q17 in tandem with a 90% increase in revenue backed by the abovementioned reason. Cumulatively, 1H18 earnings also improved by 90% to RM186.7m from RM98.4m in 1H17 thanks to higher contribution from FPSO segment arising from charter income contributed by FPSO JAK and additional revenue from shipping services and variation orders.

FPSO Lamson still in negotiation. 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 with a possibility of tie-up 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.

Maintain earnings estimates pending completion of FPSO JAK stake sale. Note that the sale transaction is slated for completion by 4Q18 and the reduction of 26% would reduce FY18-19E earnings by 5%-20% assuming only 74% stake to the charter income from FPSO JAK.

Keep OUTPERFORM on the stock with unchanged SoP-driven TP of RM4.05. We like YINSON for its: (i) secured long-term FPSO contracts, which provides recurring cash flow, and (ii) ability to secure contracts with oil majors amid competitive global FPSO market. Besides that, the potential formalisation of its 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 - 28 Sept 2017