9M18 results surpassed expectations underpinned by stronger-than-expected FPSO JAK earnings. Meanwhile, we believe the takeover of Layang project from THHE will strengthen its local presence. Post earnings upgrade and inclusion of Layang project (+20 sen/share) into our SoP, we reiterate our OUTPERFORM call on the stock with higher TP of RM4.30/share implying FY18-19E PER of 13.9x- 15.8x.

Surpassed expectations. At 91%/89% of our/consensus full-year estimates, 9M18 core net profit of RM273.3m surpassed expectations due to higher-than-expected earnings contribution from FPSO JAK and additional variation orders. Our core net profit is adjusted for: (i) RM11.7m unrealised forex loss, (ii) RM26.1m impairment loss on PPE, (iii) RM2.9m FV loss on investment properties, and (iv) RM0.7m impairment loss on receivables. No dividend was declared as expected.

Weaker QoQ earnings performance. Sequentially, 3Q18 core net profit decreased by 21% to RM86.6m from RM109.3m no thanks to (i) lower JV and associate contribution (-95%) as a result of lower charter rate from Bien Dong and Lamson coupled with (ii) higher finance cost (+82%). This is despite higher contribution from FPSO JAK, which started operations in early June as evident by the revenue expansion of 21% QoQ.

9M18 earnings up 83%. On a YoY basis, 3Q18 core net profit jumped by 70% YoY from RM50.8m in 3Q17, in tandem with a 106% increase in revenue backed by maiden contribution from FPSO JAK. Cumulatively, 9M18 earnings also improved by 83% to RM273.3m from RM149.2m in 9M17 thanks to: (i) higher contribution from FPSO segment arising from charter income contributed by FPSO JAK, (ii) additional revenue from shipping services and variation orders, and (iii) stronger USD (average rate 9M18: RM4.3215 vs 9M17: RM4.0659).

Taking over Layang job. Recently, YINSON has affirmed affidavits and extended copies to the High Court of Malaya at Kuala Lumpur with regards to the application made by THHE (Not Rated) for leave to enter into and complete a proposed novation of the contract for the provision of EPCIC and leasing for Layang FPSO facilities dated 27 November 2014 made between JX Nippon Oil & Gas Exploration (Malaysia) Limited (JX Nippon) and THHE, to Yinson Energy, its associate company. Pending further details, we estimate such contract would add c.20 sen per share to our SoP assuming: (i) USD400m capex, (ii) 7- year firm period, and (iii) 10% IRR with additional USD10m/annum (c.14% of FY19E) to its bottom-line starting from FY21.

Upgraded FY18E earnings by 12% to account for better margins from FPSO JAK and additional work orders. However, FY19E earnings is adjusted upward marginally (<1%) to RM297.3m after accounting for (i) higher margins from FPSO JAK but (ii) lower stake of 74% (from 100% previously) for FPSO JAK starting from 2QCY18 upon completion of sale of 26% stake to a Japanese consortium.

Keep OUTPERFORM. Post earnings upgrade and the inclusion of the Layang project, our TP is now revised higher to RM4.30/share compared to RM4.05 previously, which implies forward FY18-19E PER of 13.9-15.8x. We continue to like YINSON for its: (i) recurring cash flow, and (ii) ability to secure contracts with oil majors amid competitive global FPSO market. Risks to our call include: (i) project execution risk, and (ii) weaker-than-expected margins.

Source: Kenanga Research - 14 Dec 2017