The weaker 1Q20 results came within expectations given the cessation of FPSO Allan’s charter. Meanwhile, YINSON is widely expected to win one Marlim FPSO project in Brazil, with a second win also highly likely as it continues to be in close competition for several other projects in Brazil, Ghana and Malaysia. Pricing-in possible two new wins, we raised our SoP-TP to RM7.30. Maintain OP call, with the new contracts expected to act as strong catalysts.

Within expectations. 1Q20 core net profit of RM52.3m (arrived after stripping-off forex and other non-core items) came in within expectations at 21% of ours and 20% of consensus full-year earnings forecasts. No dividends were declared, as expected.

Expectedly weaker set of earnings. 1Q20 core earnings were poorer, deteriorated 13% QoQ and YoY, mainly due to the cessation of FPSO Allan’s charter contract in end-FY19. The FPSO is currently undergoing conversion works, and is set to be redeployed as FPSO Abigail-Joseph for operations at the Anyala and Madu fields, Nigeria.

Strong earnings growth in FY21. FY21 is set to stage a significant growth in earnings (+56% based on current assumptions), underpinned by the aforementioned FPSO Abigail-Joseph, as well as FPSO Helang, which is YINSON’s first local job – both of which are set for commencement in 4QFY20.

Close to winning Marlim FPSO contract. YINSON is reportedly close to clinching one of the two Marlim FPSO contracts in Brazil, with Modec expected to land the other one. Once materialised, this would represent YINSON’s debut into the Brazilian market. As reported on Upstream, Petrobras is expected to offer a 25-year charter contract, with commencement anticipated in 2022-2023. YINSON is also understood to have submitted daily charter rates at a ball-park figure of roughly USD700k/day in its bids. The company currently has an MoU with Sumitomo that in the event of a successful win in one of the Marlim FPSO bids, the Japanese trading house would take up at least a 20% stake in the contract in efforts to ease YINSON’s capex burden.

Further contract wins likely? Elsewhere, YINSON is also understood to be one of the front-runners for Aker Energy’s Pecan FPSO off Ghana (against SBM Offshore), and may also still be involved in tenders for Parque das Baleias FPSO in Brazil (competing against a partnership of Bluewater and Saipem). Locally, YINSON (in partnership with MISC) is also reported to have submitted bids for the Limbayong FPSO. We reckon the overseas projects to be roughly similarly sized to the Marlim FPSOs at around ~USD1b capex, although the local Limbayong FPSO could be smaller sized at roughly ~USD700m capex.

Pricing in the potential contract wins. Based on our assumptions for the Marlim FPSO win of (i) capex of USD1b, (ii) 80% stake, (iii) IRR of 15%, and (iv) discounting rate of 8%, we arrived to a priced-in value of RM1.66/share into our SoP. Given the funding structure, should the company land a second successful contract win, we speculate that the company may potentially need to look towards exercising one of the several options in efforts to raise capex funding – (i) pare down stake in one of its existing FPSOs, or (ii) partnership stake on the project-level. As such, we have also priced in a second new win assumption into our SoP based on a 50%-stake assumption, with all other assumptions remaining the same, arriving at a value of RM1.04/share.

Maintain OUTPERFORM, with higher SoP-TP of RM7.30 (from RM5.70 previously), after having priced-in the two new wins as mentioned earlier. No changes were made to our FY20-21E earnings post-results. Earnings from the new wins are expected to come in only in FY23-24 upon project commencement. In the meantime, no income statement impact is expected from the projects as all costs (including finance costs) will be capitalised. Our TP implies FY21 PER of 21x, which is around +1.5SD above its historical mean.

Nonetheless, we continue to like YINSON for its good management and strong project execution delivery. We believe the upcoming contract wins, if materialised, to act as strong catalysts, with further potential upside still to come from its Ezion acquisition deal, which is still yet to be factored into our assumptions.

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

Source: Kenanga Research - 27 Jun 2019