YINSON announced a new and improved deal to acquire Ezion at lower and more attractive valuations from the first proposal back in March 2019. Ultimately, we are positive on the deal, both financially and conceptually, as it allows YINSON to venture into offshore windfarm and decommissioning space via Ezion’s fleet of liftboats. The deals are still subject to various approvals, and are expected to be completed in 4QCY20. Maintain OUTPERFORM with TP of RM8.80.

New and improved Ezion deal. Last week, YINSON announced a new proposal of acquiring Ezion Holdings Limited (SGX-listed, market cap of SGD160m). This is the second reiteration of the deal, after the deal that was proposed back in 31 March 2019 lapsed (refer to our report dated 2 April 2019 on our take on the initial deal). Barring any unforeseen circumstances, the deal is expected to be completed in 4QCY20, with the company requiring approval of shareholders via an EGM, among other approvals.

Better valuations in the new deal (refer below for a table of comparison of key terms between the old deal and new deal). To summarise, the new deal would see YINSON forking a cash outlay of USD150m for 63.4% stake in Ezion. In agreement with relevant bankers, the deal would also see Ezion’s total debts reduced from ~USD1.6b to ~USD400m, of which will be also be consolidated under YINSON’s books. As such, this would price Ezion at an enterprise value of USD639.3m, implying an EV/EBITDA of 11x (based on Ezion’s FY19A core EBITDA of USD56m). As a simplistic comparison, the old deal would have priced Ezion at an EV of USD856m – implying EV/EBITDA of 15x.

Positive on the improved deal. As we were positive on the previous deal, naturally we are much more positive on this new and improved deal given the more attractive valuations. To summarise, the acquisition would allow YINSON to venture into the offshore windfarm renewable energy, and the decommissioning via Ezion’s fleet of 12 liftboats – thereby diversifying the company’s business away from oil and gas production value chain in its FPSO business. Current valuations would imply acquisition price of EV per liftboat of USD53m – cheaper than the build-cost of USD65-80m per liftboat if YINSON were to venture into the space alone. Additionally, aside from the liftboats, included in Ezion are also other non-core assets (which includes fleets of barges, OSVs, drilling rigs, and associate companies), which can be monetised to further enhance acquisition valuations.

Financial impact from the acquisition. According to the proforma accounts, the acquisition would raise YINSON’s net-gearing to 1.3x, from 0.9x currently, as total debt increases from RM3.1b to RM5.3b. However, the freed-up working capital in Ezion post-acquisition would help improve its liftboat fleet’s utilisation to ~100%, from ~40% currently. These liftboats are understood to have ready contracts, but the lack of sufficient working capital have prevented them from being deployed. Based on our back-of-envelope, we believe a fully utilised liftboat fleet would contribute to ~RM75m PAT to YINSON’s earnings (or ~21% of FY21E). These numbers have taken into account the lowered depreciation and finance expenses post-impairments and post-debt reduction, and are based on these assumptions; (i) core EBITDA of USD100m upon 100% utilisation of liftboats, and (ii) YINSON’s stake remaining at 63.4%

Upcoming equity fund raising. In light of this, the company has also repeatedly guided the possibility of an equity fund raising within the year, to raise an approximate ~RM1b. The funds raised would be utilised for the aforementioned Ezion acquisition, as well as equity portion capital for three upcoming mega-FPSO projects: Marlim 2 FPSO and Parque das Baleias FPSO in Brazil, as well as Pecan FPSO in Ghana. From our back-of-envelope calculations, assuming a theoretical fund raising price of RM7, the exercise would lead to roughly ~13% share base dilution. Ultimately, we do not feel a fund-raising to be negative for YINSON, given the attractive ROEs of the projects.

Why diversification away from FPSO is not such a bad thing. While we understand some investors’ concern over YINSON’s efforts in diversifying away from its current FPSO business, we feel that the move could be a positive in the longerterm. YINSON’s exposure in the FPSO business means that the company is fully exposed to the production stages of oil and gas projects. With a gradual reduction of reliance on oil and gas as an energy source, especially in developed markets, this could place the company’s future sustainability into question in the far future. In fact, the offshore wind market is expected to grow by 9x by 2030, with China to contribute to a large chunk of the growth. By venturing into the renewable energy space now, while asset prices are still relatively cheap, this reflects on management’s intentions of future-proofing the sustainability of the business in the far future. This is on top of the positive earnings impact that the Ezion deal could bring, plus the acceptable acquisition valuations. In conclusion, we believe the deal not only makes financial sense, but also conceptual sense.

Maintain OUTPERFORM, with unchanged SoP-TP of RM8.80, implying PER of 26x on FY21E earnings. Our valuations have not priced in any part of the Ezion deal as the proposals are still subject to various approvals. Note that our valuations have also priced in a successful contract materialisation for Parque das Baleias FPSO in Brazil, and Pecan FPSO in Ghana.

Risks to our call include: (i) failure to materialise contract wins, (ii) project execution risks, and (iii) costs overrun

Source: Kenanga Research - 2 Mar 2020