Last week, news sources reported that YINSON could be “weeks away” to securing the FPSO Parque das Baleias contract in Brazil. Recap that YINSON emerged as the only bidder after other competitors were disqualified. We believe this could be a much needed catalyst for the stock, with our model assumptions suggesting that the award could contribute to an incremental fair value of RM2.09/share. Maintain OUTPERFORM, with an increased TP of RM8.05.

Petrobras ready for new FPSO contract. Last week, Upstream reported that YINSON and Petrobras are close to agreeing terms for the FPSO in Parque das Baleias, off Brazil. The article further suggested that Petrobras approval of a contract is “just weeks” away.

What we know about Parque das Baleias thus far. YINSON was left as the sole bidder for the contract after the leading bidder Bluewater ran into financial difficulties. It was reported that Petrobras ultimately decided not to do a re-tendering despite the lack of competition, as this would result in the project being further delayed. Should the award materialise, this would be YINSON’s second FPSO in Brazil after Marlim 2 last year. Contract tenure is likely to be for a 22.5-year charter, with the FPSO likely to have a capacity for 100m barrels of oil per day and 5m cubic metres of gas per day.

Contract win to serve as a re-rating catalyst. We believe that the successful award of the contract could serve as a much needed catalyst for YINSON. Based on our model assumptions, the contract should contribute an additional fair value of RM2.09/share, based on the assumptions of: (i) USD1b capex, (ii) IRR of 15%, (iii) discounting rate of 7%, and (iv) YINSON’s stake of 80%. Finance lease accounting would also mean that profit recognition could start soon after the contract award.

Beyond this, YINSON is also the frontrunner for two other FPSO bids – (i) Pecan project, off Ghana, competing against SBM Offshore, and (ii) Limbayong development, off Sabah, in partnership with MISC. We believe further contract wins are highly likely, given YINSON’s proven project delivery and execution track record, as well as competitiveness in bidding, although delays in both these projects could mean a contract award date later in 2020 or even in 2021.

Maintain OUTPERFORM, with higher SoP-TP of RM8.05 – implying 24x forward PER. We raised our SoP-TP to RM8.05 (from RM7.75 previously) after factoring in a successful Parque das Baleias contract award. Note that our valuations have also priced in further contract win beyond this, based on half the valuations assumption for the Brazilian projects.

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

Source: Kenanga Research - 17 Feb 2020