YINSON has finally been awarded the much anticipated Marlim 2 FPSO contract from Petrobras, worth ~USD5.4b for a charter of 25 years commencing 1QCY23. Moving forward, we believe further contract wins are likely, with the company still in active tenders for key projects. Maintain OUTPERFORM and SoP-TP of RM7.75, with our valuations having already priced in one more additional contract win beyond Marlim 2 FPSO.

Award of Marlim 2 FPSO. YINSON announced that it had been awarded binding letters of intent for the Marlim 2 FPSO from Petrobras. The term of charter will be approximately 25 years, with an estimated aggregate contract value of USD5.4b (implying daily charter rate of USD592k). The FPSO is expected to commence operations by 1QCY23.

Takeaways from the contract win. We are positive on the contract being finally awarded, although not surprised as it was already much anticipated. Note that the final awarded contract is slightly below YINSON’s original submitted bid of USD684k/day. We understand that this new contract could adopt a “finance lease” accounting treatment (as opposed to “operating lease” for YINSON’s existing order-book), which would result in frontloading of some profit recognition, even during the asset’s construction phase (as opposed to profit only being recognised upon project commencement), although cash flow and project NPV would remain unchanged regardless of accounting treatment. Meanwhile, Sumitomo is also expected to participate with at least 20% effective interest in the project.

Our assumptions remaining intact. Overall, we believe our Marlim 2 FPSO assumptions remained mostly intact, with capex of USD1b and project IRR of 15%. We made no changes to our FY20-21E numbers, pending further development and guidance, although we acknowledge the potential for further upside in earnings given the finance lease accounting treatment. Nonetheless, we wish to highlight that after the implementation of the finance lease accounting treatment, P&L analysis would seem less relevant given the increased disconnect with the company’s operational performance, with earnings during the early project phase likely to be overstated.

Maintain OUTPERFORM and SoP-TP of RM7.75, with our valuations having priced-in an additional win after this latest contract, based on similar assumptions of: (i) capex of USD1b, (ii) project IRR of 15%, and (iii) discounting rate of 8%. Our SoP-TP implies FY21E PER of 23x, which is at +2SD from our 5-year mean.

Moving forward, we believe further contract wins for YINSON are very likely, with the company still in active FPSO tenders for: (i) Parque das Baleias fields in Brazil, (ii) Greater Pecan project, off Ghana, and (iii) Limbayong, off Sabah, Malaysia – all of which are expected to be awarded within the coming months. We reckon YINSON’s balance sheet should be able to take-on one additional project, with a second win most likely necessitating a minor equity raising exercise (i.e. rights issue) of roughly ~RM500m.

Additionally, with Marlim 2 FPSO in the bag, we believe this could give further costing advantages for YINSON in Brazil, thereby enhancing its competitive edge for the Parque das Baleias bid, while it already possess existing expertise in Ghana via its FPSO JAK. Risks to our call include: (i) project execution risk, (ii) weaker-than-expected margins, (iii) termination of contracts, and (iv) failure to land new contracts.

Source: Kenanga Research - 17 Oct 2019