YINSON is looking to raise its stake in Rising Sun Energy by an additional 57.5%% for a cash consideration of INR1.1b (~RM61.4m). This will bring its total stake to 95% and total investment outlay to INR2.3b (~RM126m). While financial impact is relatively small for now, this marks as YINSON’s first effort in its broader strategy of venturing into renewable energy and diversifying from oil and gas. With the group’s target of reaching 5GW of renewable energy in 5 years, we expect more ventures of similar nature to come. Maintain OP with TP of RM7.10.

Increases stake in Rising Sun Energy. YINSON is seeking to acquire an additional 57.5% stake in Rising Sun Energy Pvt Ltd, for a total cash consideration of INR1.1b (or ~RM61.4m). This follows from its previous round of acquisition back in March 2020, when YINSON acquired an initial 37.5% stake in Rising Sun Energy for a total investment outlay of ~INR1.2b (or ~RM64.4m), consisting of INR554m (or ~RM30.9m) cash consideration and INR365m (or ~RM20.4m) to repay certain outstanding liabilities. In conclusion, this brings YINSON’s total stake to 95%, with a total investment outlay of INR2.3b (or ~RM126m). Barring any unforeseen circumstances, the acquisition is expected to be completed by 4QCY20.

Corporate background: Rising Sun Energy owns two operational solar power plants commissioned in 2017 located in Bhadla Solar Park Phase-II, Rajasthan, India, with a combined capacity of 140MW (AC). The offtake contract is a 25-year power purchase agreement (PPA) expiring 2042 with NTPC Limited (India’s largest power utility company, majority owned by the Indian Government), at a tariff of INR4.35/kWh (or RM0.24/kWh).

Expanding footprint in renewable energy. Overall, we were not overly surprised by the stake increase, as it had already been well guided and anticipated. In fact, we are also mildly positive that the increased stake acquisition is priced lower compared to the first round. The acquisitions form part of YINSON’s first steps in its broader strategy of gradually transforming itself into a global energy player over the longer term, diversifying its earnings base and reducing its reliance on the oil and gas sector. With the group aiming to reach a capacity of 5GW of renewable energy within the next 5 years, we expect more ventures of similar nature to come in the future.

Financially, these acquisitions are expected to pose minimal impact for the time being. Rising Sun Energy is in small losses (as at FY19), but the company is expected to turn profitable after changing its depreciation policy post-consolidation. Project IRR for the PPA is understood to be around 10-11%. Nonetheless, earnings contribution at the time being is still expected to be rather small for YINSON (i.e. <5%), while net-gearing levels should also remain largely unaffected (1.8x as at end-April 2020).

Maintain OUTPERFORM, and SoP-TP of RM7.10 (implying 20x forward PER). No changes to our assumptions given minimal financial impact. We continue to like YINSON for its defensive business nature with recurring income, and a competent management team.

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

Source: Kenanga Research - 24 Aug 2020