We returned from YINSON’s briefing feeling positive, with the company still active and competitive in its overseas bids in Brazil and Ghana. Meanwhile, the commencements of two upcoming projects, namely FPSO Helang and Abigail-Joseph are also expected to drive sizable earnings growth in FY21 and beyond. Reiterate OP, with SoP-TP of RM5.50, backed by further expected contract wins on top of solid fundamentals and earnings delivery.

Recap of 4Q19 results. To recap, YINSON posted FY19 core net profit of RM266.3m, 23% lower YoY on the back of: (i) jump in finance costs following FPSO J.A.K.’s commencement in June-2017, and (ii) poorer JV contributions following a scheduled step-down of charter rates in FSO PTSC Bien Dong 01, and interim charter for FPSO PTSC Lam Son. Meanwhile, 4Q18 posted sequentially weaker core net profit of RM59.9m (down 27% QoQ) mainly dragged by lower JV contributions. We gathered that the lower JV contributions in this particular quarter were due to higher operating expenses for its O&M-arm (40% stake) for the FPSO J.A.K. in Ghana. The quarter also recognised impairments in JV totalling RM16.4m (not recognised in JV-line of income statement), arising from more conservative internal discounting rates and extension tenure assumptions, in compliance with accounting standards. This is mitigated by a RM38.8m reversal of impairments for FPSO Allen, after having successfully secured its redeployment into the Anyala & Madu fields.

Potential contract wins. Although certain news reports suggested that Modec could be the favourite ahead of YINSON for the Marlim 1 and 2 FPSO bids in Brazil, we are sanguine on YINSON as it could still remain competitive throughout the bidding process. Modec had recently submitted its Mero-2 bid of USD790k per day charter rates, much higher than likely winner SBM’s bid of USD700k per day – thus possibly indicating Modec’s current costs structures and loaded-out capacity. Coupled with the fact that Modec already has 5 upcoming projects in hand, it is believed that YINSON may still have a slight advantage in terms of pricing and costs structures. Meanwhile, YINSON is also actively tendering for Parques Das Baleias fields in Brazil and Pecan fields in Ghana. We expect some of these contracts awards to be announced by 2Q-3QCY19. Should YINSON manage to secure more than one of the aforementioned bids, the company is also open to the possibility of a partial-stake sale in one of its existing FPSO projects to raise capex funding.

Earnings visibility. Going forward, we expect a sizable jump in FY20E earnings, driven by the expected commencement of FPSO Helang and Abigail-Joseph in 4QCY19. Any further contract wins from here would further drive earnings growth beyond FY22. However, earnings growth may be slightly lacklustre in FY20 given the lack of earnings from FPSO Allen, which will later be converted into AbigailJoseph.

Reiterate OUTPERFORM, given its capable management, potential upcoming contract wins, and backed by solid fundamentals on top of earnings growth delivery, with SoP-TP of RM5.50 – implying 15.6x PER on FY21E, roughly in-line with its 5-year average. Note that our valuations have also priced in: (i) one potential new contract win, and (ii) successful charter extensions for FPSO Adoon and FPSO PTSC Lam Son.

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

Source: Kenanga Research - 29 Mar 2019