YINSON posted a strong set of 1HFY21 results, thanks to the recognition of EPCIC profits from FPSO Anna Nery, coupled with contribution from FPSO Helang. 2HFY21 is expected to be even stronger, helped by the charter commencement of FPSO Abigail-Joseph by end-Oct 2020. Maintain OUTPERFORM, with TP of RM7.10. The Parque das Baleias FPSO is the only yet-to-be-awarded contract being factored into our valuations (contributes ~RM1.60/share in our SoP), with the rest facing relatively low risk of deferments/terminations. Still like the name for its defensive earnings base.

1HFY21 results above expectations. YINSON posted 1HFY21 core net profit of RM234.7m, coming in above expectations, at 60% of our, and 64% of consensus, full-year earnings forecasts. The better-than expected earnings were due to the recognition of engineering, procurement, construction, installation and commissioning (EPCIC) profits arising from the construction of the FPSO Anna Nery which started during the quarter, as a result of finance lease accounting treatment for the contract. Nonetheless, announced interim dividend of 4.0 sen per share (same as 1HFY20) is deemed well within expectations.

Strong results from recognition of EPCIC profits. 2QFY21 recorded core net profit of RM136.7m, a 40% jump QoQ from 1QFY21. As aforementioned, this was mainly due to the recognition of EPCIC profits from the construction of FPSO Anna Nery. Stripping-off the EPCIC profits, core earnings would be around RM95m – somewhat similar to last quarter. Cumulatively-YTD, 1HFY21 profits more than doubled YoY, similarly thanks to EPCIC profits from FPSO Anna Nery, as aforementioned, coupled with contributions from FPSO Helang (charter commenced December 2019). Stripping off EPCIC profits, 1HFY21 core earnings would have recorded close to RM193m.

Expecting stronger 2HFY21. Despite the strong YTD results, 2HFY21 is anticipated to be even stronger as the charter of FPSO Abigail Joseph is expected to commence by end-October 2020. Note that upon commencement of the charter, the company will recognise an accounting treatment of a one-off sale revenue of the FPSO, not too dissimilar to the one recognised back in 4QFY20 arising from the commencement of FPSO Helang.

Finance lease accounting leads to increased mismatch between reported profits and cash flows. Following the adoption of finance lease accounting treatment (as opposed to operating lease) for the company’s newer FPSOs (i.e. FPSO Helang, FPSO Abigail-Joseph, FPSO Anna Nery), this will lead to a further mismatch between the company’s reported profit and cash flows. EPCIC profits recognised during the construction phase is not matched with any similar incoming cash flows from the project. Furthermore, during the earlier years of the charter contracts, reported profits will tend to be overstated against actual cash flows received. This would be counteracted as towards the later years of the charter, reported profits would be gradually much lower than cash flows generated from the asset. However, despite the accounting treatment, these should have a minimal impact towards the valuations of the projects.

Maintain OUTPERFORM, with unchanged SoP-TP of RM7.10 (implies FY22E forward PER of 15x). Post-results, we raised our FY21E/FY22E earnings assumption by 25%/24% to account for higher recognition of EPCIC profits.

We still like YINSON for its resilient delivery of earnings and growth potential, and being a defensive play against the current oil industry downturn. Within our SoP, the Parque das Baleias FPSO remains as the only contract that is still yet to be awarded (contributes ~RM1.60/share in our SoP), and thus would naturally pose as the highest risk of facing deferment/termination. Meanwhile, we believe other secured contracts at hand in the order-book carry relatively low risk of termination.

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

Source: Kenanga Research - 29 Sept 2020