Through a series of proposals, YINSON is seeking to acquire a c.70% stake in Ezion for a cash outlay of USD200m. This would act as YINSON’s long-term venture into the renewable energy space, thereby diversifying from its current reliance in oil and gas, and FPSOs. Overall, while initially sceptical, we are ultimately positive on the deal given its favourable financial impacts. Maintain OP and TP of RM5.50, pending further developments.

Proposed acquisition of Ezion. Through a series of corporate proposals (refer to next page for the breakdown of proposals involved), YINSON is seeking to acquire a c.70% in SGX-listed Ezion Holdings Limited (market cap of SGD160m), effectively for a cash outlay of USD200m. Ezion’s core business is in the chartering of lift boats, with a fleet of 12, which are primarily used for installation and maintenance of offshore wind farms. That aside, Ezion is also involved in the chartering of jack-up rigs, OSVs, tugs and barges. As at its latest FY18 results, Ezion registered net losses of USD344m (core net loss of USD49m, after stripping-off impairments and other non-core items) and negative book-value of USD254m. Note that the announcement was merely a proposal as negotiations are still on-going, and hence, terms and conditions are still yet to be finalised. Additionally, YINSON would still need to conduct due diligence studies, and obtain board, regulatory and shareholders’ approvals. Tentatively, the proposals are expected to be concluded by end-3QCY19.

Acquisition justification: The acquisition would allow YINSON to venture into the renewable energy and wind farm space, thereby diversifying its earnings base from FPSOs. This is done so to mitigate risks of disruptions of the oil and gas industry in the longer-term – i.e. 10-20 years (refer to next page for a more detailed discussion).

Positive on the move. Although we were initially sceptical of YINSON’s diversification away from the FPSO space, we are ultimately positive on the move given its favourable financial impacts. YINSON’s acquisition price implies a post-restructuring valuation of 0.35x PBV, relatively attractive against YINSON’s trading PBV range of 2.2-2.9x. Additionally, based on our rough projections, postacquisition, YINSON’s book-value would also approximately double (from current RM1.60 per share), barring any further impairments, with its net-gearing also slightly improved (from current 1.1x to ~1.0x), helped by the borrowings haircut of ~USD716m as a result of the acquisition. Earnings-wise, we gathered that current losses were caused by its lift boats seeing only a 50% utilisation. Although contracts were secured, the company was unable to execute the jobs due to its working capital constraints. This is expected to be resolved upon acquisition, and thus, would supposedly lift its utilisation back to ~100%. Based on our back-of-envelop calculations, we project FY21E earnings impact to be roughly ~RM80m (or ~+21%, ~USD20m), thereby also implying the acquisition’s forward PER valuation of 10x.

Maintain OUTPERFORM. We made no changes to our FY20-21E numbers, and SoP-TP of RM5.50, pending further concrete development from this deal. Our TP implies 15.6x PER on FY21E, roughly in-line with its 5-year average. Should we value Ezion at 0.4x PBV, this would represent approximately an additional RM0.70 (or +13%) to our SoP-TP. 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 - 2 Apr 2019