YINSON had finally managed to seal a 4-year extension contract for FPSO Adoon, worth USD137.5m, after operating under multiple interim extensions since last October. While we are positive on the finalised extension, the contract was well-anticipated. No changes to FY20-21E numbers, with FY21E expecting to see a jump in earnings. Reiterate OUTPERFORM with TP of RM5.70, as we continue to be exceedingly optimistic with its outlook.

Finalised 4-year extension for FPSO Adoon. Yesterday, YINSON announced that it had finally managed to seal a 4-year extension with Addax Petroleum for the charter of FPSO Adoon, with a contract value of USD137.5m (~RM574.1m). The charter extension will be backdated from 17 October 2018, ending on 16 October 2022.

To recap, the FPSO Adoon was initially contracted in Oct-2006 for a firm period of 8 years, with options to renew for a further 8 years. The original firm period expired in Oct-2014, and the charter was subsequently extended for another 12 months until Oct-2015, and thereafter for another 3 years until Oct-2018. Since then, as the FPSO continued to operate, the contract has been extended via multiple interim extensions, until the longer-term deal was being finalised as reported in yesterday’s announcement.

Positive on the contract extension. We are positive on the finalised extension contract, providing clarity on the matter. Nonetheless, we believe this eventual finalisation of the charter extension contract was already largely anticipated, and had been well-guided by management as negotiations have been actively taking place for the past several months. That said, we expect EBIT margin to be well above 40%. No changes were made to our FY20-21E numbers as we have already factored-in a successful extension into our assumptions.

Optimistic outlook moving forward. YINSON’s FY21E earnings are expected to see a substantial jump, underpinned by the commencement of (i) FPSO Helang, and (ii) FPSO Abigail-Joseph, both of which are expected to commence operations by 4Q20. This is on top of its proposed acquisition of Ezion (expected completion by this year), which could contribute up to another ~USD20m per annum towards its bottom-line (yet to be taken into assumption). Additionally, based on recent news flow, YINSON may be close to winning one of its two Marlim FPSO bids in Brazil. This is undoubtedly a positive development, especially considering the fact that YINSON was reported lagging behind favourites Modec earlier in the bidding phases. Elsewhere, YINSON is also reported to be one of the frontrunners for Aker Energy’s Greater Pecan FPSO in Ghana, as well as the Parque das Baleias FPSO in Brazil.

Reiterate OUTPERFORM. Post-announcement, we raised our SoP-TP to RM5.70 (from RM5.50 previously), after some model updates to mildly tweak our forward projections and assumptions. Our TP implies FY21E PER of 16x, roughly in-line of its 5-year average.

Overall, we continue to like YINSON for being well managed, as proven by its project execution delivery and strong financial footing, coupled with its contract winning capabilities. That said, as we have priced-in only one contract win into our valuations, additional contract wins could pose further upside to our numbers.

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 - 19 Jun 2019