1H19 Core Earnings (-36% YoY) came in below expectations due to higher-than-expected finance costs from FPSO JAK. Nonetheless, YINSON is well positioned to benefit from an improving FPSO market, underpinned by strengthening oil prices. Its contract winning ability is also further enhanced by an improved balance sheet following the disposal of its 26% stake in FPSO JAK. We maintain our OUTPERFORM call, albeit at lowered TP of RM5.00.

Below expectations. 1H19 Core Net Profit of RM115.8m (arrived after stripping-off forex gains and other non-core items totalling RM18.3m) came in below expectations, making up 39% and 41% of our and consensus full-year forecasts, respectively. We believe the variance was due to the higher-than-expected finance costs stemming from FPSO John Agyekum Kufuor (JAK) as it commenced operations in June last year. Nonetheless, the announced dividend of 4.0 sen per share (identical to 1H18) is deemed as within expectations.

Overall weaker results. 1H19 Core Net Profit recorded a YoY decline of 36%, mainly dragged by (i) jump in finance costs by 4x arising from FPSO JAK’s commencement in June last year (no interest expenses were recognised pre-commencement), coupled with (ii) additional non- controlling interests (NCI) contribution of RM6.8m (versus nil in 1H18) as a result of the 26%-stake disposal in JAK FPSO, completed on 6 June 2018, and (iii) 87% plunge in joint ventures’ earnings contribution due to lowered charter rates for FSO PTSC Bien Dong 01 and FPSO PTSC Lam Son (both at 49% stake) as their contracts went into extension periods.

Sequentially, 2Q19 Core Net Profit came in lower QoQ by 14%, dragged by: (i) higher NCI contribution by RM6.2m due to the aforementioned reason, and (ii) higher income taxes by 41% from higher forex gains. In fact, core PBT improved 5% QoQ, in tandem with revenue growth of also 5%, possibly from the favourable USD movement.

More contract wins expected. We believe YINSON will be well- positioned to benefit from a gradual pick-up in global demand for FPSOs, underpinned by the strengthening oil prices of late. The group is currently in exclusive negotiations for the supply of a new FPSO at Anyala & Madu (Nigeria) fields, with expected capex of c.USD400m. This is below YINSON’s target capex of USD1b, and as such, we believe the group is still actively looking for more projects. Additionally, YINSON’s contract wins ability should be further enhanced by its improved balance sheet (net-gearing of 0.9x as at end-2Q19 from 1.2x in end-FY18) following the 26% stake disposal in JAK FPSO.

Maintain OUTPERFORM. Post-results, we lowered FY19-20E earnings by 24-20% after adjusting for higher finance costs. Resultantly, our SoP-TP is also trimmed to RM5.00, from RM5.30 previously. Despite the results disappointment, we continue to like YINSON within the FPSO space for being well managed, as proven by its project execution delivery and strong financial footing, coupled with contract winning ability moving forward. Against its closest peer ARMADA, YINSON has far superior financials given its better-managed debts and project financing approach.

Risks to our call include: (i) project execution risk, and (ii) weaker-than- expected margins, and (iii) termination of contracts.

Source: Kenanga Research - 25 Sep 2018