TLV’s force majeure on FPSO CRD contract could lead to contract termination, but all costs incurred are expected to be recoverable in the worst case scenario. Meanwhile, the overall FPSO market is improving with multiple on-going bids in countries such as Nigeria, Brazil and Ghana. Thus, we maintain OP call with higher SoP-driven TP of RM4.50 by imputing another contract win in FY20 (+49.0 sen/share) despite removing CRD valuation (29.0 sen/share).

Announced force majeure by TLV. Yesterday, YINSON announced that PTSC Ca Rong Do Ltd, a 49%-51% JV jointly owned by YINSON and PetroVietnam Technical Services Corporation (PTSC) has received a notice that PTSC was notified by Talisman Vietnam 07/03 B.V. (TLV) of a force majeure event where TLV has been directed not to carry out the scheduled work program for the CRD Project for the time being. Management guided that it is neither a suspension nor a termination as they are still in the midst of seeking further clarification from the clients.

All costs incurred are recoverable. This is negative to YINSON as the JV is likely to face contract termination, losing the future FPSO charter earnings (estimated at USD8-10m/annum @49% stake starting from 3QCY19). Despite not being able to disclose the amount spent todate, management also emphasized that in the worst case scenario, all costs are recoverable. Recall that the JV has secured the 10+5 year contract worth USD1b in April last year and purchased the FPSO OSX- 1 at an estimated price range of USD350m-400m for further modification. While the ownership of the vessel is not finalised at this juncture, we do not discount the possibility that YINSON will not own the vessel if all the costs are reimbursed by the client.

Update on FPSO Lam Son. Separately, YINSON has entered into an interim contract with PTSC to charter FPSO PTSC Lam Son with effect from 1 July 2017. This is largely to facilitate the charter payment for services provided since July last year until a new charter contract is established within the next six months.

No changes to our FY18-19E earnings pending 4Q18 results announcement this week. Meanwhile, in the absence of the CRD earnings that ought to contribute starting from 3QCY19, we introduced FY20E earnings of RM271.2m (-8.8% YoY) assuming; (i) forex rate of RM4.1/USD, (ii) full contribution of FPSO JAK at 74% stake, and (iii) contract extension for FPSO Allan upon firm contract expiry in April 2019.

Improving outlook. We understand that the FPSO outlook is improving as YINSON is currently bidding for multiple projects in countries such as Nigeria, Brazil and Ghana. Thus, we believe YINSON is preparing to secure another big project (c.USD1b capex) post completion of sale of 26% stake in FPSO JAK.

Maintain OUTPERFORM with higher TP of RM4.50. In view of potential termination risk, we have removed the CRD project valuation (29.0 sen/share) from our SoP. However, in view of better FPSO outlook, we imputed additional contract win in FY20 into our SoP, amounting to 49.0 sen assuming; (i) 14% IRR, (ii) 8-year firm period, (iii) 50% equity stake, and (iv) USD1b capex. Note that its share price has retraced 12% from its YTD high of RM4.29, dragged by the volatile equity market. All in, we keep our OUTPERFORM call on the stock with higher TP of RM4.50 (from RM4.30 previously) factoring both the abovementioned items.

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

Source: Kenanga Research - 28 Mar 2018