We view the exclusive negotiations between YINSON and First E&P for the supply of a FPSO positively as we believe YINSON is poised to secure the contract which could potentially boost their outstanding order-book by 38% and introduce a new stream of recurring income. Without changes to estimates, we continue to like YINSON for their stable income amidst the better FPSO outlook. Reiterate our OP call with higher SoP-derived TP of RM5.30.

Exclusive negotiations for a new FPSO. Last Thursday, YINSON entered into an exclusive negotiation with First Exploration & Petroleum Development Company Limited (First E&P) to discuss the supply of a FPSO along with O&M works for Anyala & Madu field (under oil mining lease 83 & 85) located 40km offshore from Nigeria. Tentatively, the contract is to have a firm period of 7 years with an option to renew for up to 8 years. The oil field is jointly owned by First E&P (40%) and Nigerian National Petroleum Corporation (60%).

Confident to win. The planned FPSO for Anyala & Madu will be developed based on an existing FPSO to exploit the field containing c.340m barrels of oil equivalent (boe). With an estimated capex of USD400m, the Anyala & Madu FPSO is intended to produce 50k bbls of oil and 120MMscf of gas per day. We are confident that YINSON would be able to seal the deal given their robust track records within the FPSO space. If successful, this would be their second FPSO in Nigeria (after FPSO Adoon secured back in 2006).

Positive impact. Overall, we are positive on the contract as it could potentially boost YINSON’s current outstanding order-book of c.USD3.2b by c.USD1.2b (+38%; USD800m firm, USD400m option) and also inject another stream of recurring net income worth c.RM100m/annum (37% of FY20E earnings) based on EBIT margin of 35%. For now, we make no changes to FY19-20E earnings as contributions from the new FPSO will only kick in from FY21 considering time required for vessel acquisition and modification.

Appetite for more. The demand for FPSOs is picking up as oil majors gradually revive projects shelved during the industry downturn, underpinned by the stronger and more stable oil prices. Given that the capex size of USD400m for the Anyala & Madu FPSO is relatively small compared to YINSON’s earlier indicated capex target of USD1.0b, we believe YINSON is still on the lookout for more projects in Mexico, Ghana, and Brazil in which 3 tenders (of which 2 are worth c.USD1b) will potentially be announced by year end.

Maintain OUTPERFORM with higher SoP-derived TP of RM5.30 (from RM4.50) after imputing in RM0.60/share for the Anyala & Madu FPSO assuming; (i) USD400m capex, (ii) 15% IRR, (iii) 7-year firm, and also accounting for an expected O&M contract win (Layang FPSO worth RM0.20/share). Note that we have an additional expected FPSO contract win in FY20 amounting to RM0.49/share in our SoP as we foresee YINSON securing another FPSO contract given the healthy FPSO market, underpinned by stronger crude prices, and YINSON’s capacity to bid further on the back of a stronger financial footing post disposal of 26% in JAK FPSO, which was completed on 6th June 2018. Our new contract in FY20 assumes; (i) 14% IRR, (ii) 8-year firm period, (iii) 50% equity stake, and (iv) USD1b capex.

Our TP implies FY19-20E PER of 19.5-21.3x which we deem fair given YINSON’s ability to: (i) generate recurring cash flow, and (ii) secure contracts with oil majors amid the competitive global FPSO market. Risks to our call include: (i) project execution risk, and (ii) weaker-than- expected margins.

Source: Kenanga Research - 18 Jun 2018