9M19 results came in above our expectations, owing to better-than-expected operating margin, but in-line with consensus estimates. Overall, we continue to like YINSON for being well-managed, coupled with its vastly superior financials against FPSO peers, with further contract wins still expected. Post-results, we raised FY19-20E CNP by 10- 8%. Maintain OUTPERFORM, with unchanged SoP-TP of RM5.00, pricing-in contract wins.

Above our expectations. 9M19 core net profit of RM207.2m (arrived after stripping off impairments, forex gains and other non-core items) exceeded our expectation, coming in at 92% of our full-year forecast, due to better-than-expected operating margin. However, the results were in line with consensus at 78%. No dividends were announced, as expected.

Poorer results YoY. YoY-YTD, 9M19 core net profit dived 26%, mainly due to: (i) jump in finance costs by 2.6x following the kick-in of borrowings as FPSO JAK commenced in June 2017, and (ii) JV contributions plunged 76%, with a scheduled step-down of chartering rate in FSO PTSC Bien Dong 01, while FPSO PTSC Lam Son’s contract continued to run on an interim basis. As for the individual quarter of 3Q19, core net profit of RM81.5m was lower YoY by 16%, dragged by jump in finance cost by 44%, coupled with slightly poorer margin (gross margins declined 4ppt). However, results were better sequentially, with core net profit improving 25% QoQ. This is in tandem with an 8% rise in revenue from higher charter rates contributions, coupled with a slight improvement in margin (gross margins added 3%), and lower finance costs by 7%.

More contract wins expected. We believe YINSON is well-positioned to benefit from a gradual pick-up in global demand for FPSOs. Currently, the group carries an order-book value of around USD4.1b, with the bulk of it stemming from FPSO JAK. Outside the order-book, YINSON is currently in exclusive negotiations with First E&P for a contract in Anyala & Madu field in Nigeria. The contract, if successful, is expected be a have a 7-year firm period plus an additional 8-year extension option. Meanwhile, YINSON is also actively bidding for 3 new jobs in Brazil, and 1 new job in Ghana, all of which involves capex of around c.USD1b each. The company is eyeing to win at least one of the new jobs mentioned, with expected award date by 1HCY19.

Maintain OUTPERFORM. Post-results, we raised our FY19-20E CNP by 10-8% after increasing our operating margins assumption. Nonetheless, our SoP-TP is kept unchanged at RM5.00, implying (i) 22x forward PER at +1.5SD above its 5-year mean, and (ii) 2.4x forward PBV at +2SD above its 5-year mean. Despite the premium valuations, we still find our OP call justifiable, backed by its promising outlook moving forward given its (i) earnings quality and delivery, (ii) stable order-book, and (iii) strong contract flow anticipated, which its impact will be substantially visible in FY21. Note that our valuations have priced-in: (i) 1 new contract win with capex of c.USD1b, (ii) successful materialisation of a contract at Anyala & Madu, and (iii) successful extensions for FPSO Adoon and PTSC Lam Son. As such, failure of fruition of any of the aforementioned is a downside risk. Overall, 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 (netgearing of 1.0x vs ARMADA’s 2.0x).

Risks to our call include: (i) project execution risk, and (ii) weaker-thanexpected margins, (iii) termination of contracts, and (iv) failure to land new contracts as anticipated.

Source: Kenanga Research - 21 Dec 2018