We are positive on YINSON securing an LOI from Enauta for the Atlanta Field FPSO project, materialising from an MOU previously. We believe the unique contract structure gives YINSON much-needed flexibility for its capital and project management. Additionally, YINSON also announced the much-expected rights issue plus a 1-for-1 bonus issue. Maintain OP with TP of RM7.35.

LOI for Atlanta Field FPSO. YINSON announced that it had entered into a letter of intent (LOI) with Enauta to provide and operate an FPSO via a redeployment of OSX-2 for the Atlanta Field located in Santos Basin, offshore Brazil. This development follows up further from the previous binding MOU between the two companies (refer to our report dated 30 Aug 2021).

The LOI is for an engineering, procurement, construction and installation (EPCI) contract with a call option to acquire the asset- owning company of the project with a 15-year time charter agreement, extendable by a further 5 years. The estimated value of the EPCI contract is USD505m (or ~RM2.1b), with the value of the project further increased to USD1,981m (or ~RM8.3b, inclusive of the 5-year extension) should YINSON exercise the call option.

Positive on the LOI. Overall, we are positive on the successful materialisation of the LOI from an MOU previously. The unique contract structure – i.e. a sale-and-lease-back of the FPSO from Enauta (as compared to a conventional straight-up charter contract), gives more flexibility for YINSON to better allocate capital and resources for its project management, given that YINSON already has several other Brazilian projects progressing on hand (i.e. Marlim, Parque das Baleias). Essentially, from YINSON’s perspective, majority of the project’s equity capex only needs to be forked out ~2 years later after the completed conversion of the FPSO and upon the exercising of the call option in order to undertake the charter contract.

Bonus + rights issue. Additionally, YINSON had also finally announced the much-expected rights issue, to raise ~RM1.1-1.2b (actual quantum and subscription price to be determined at a later date). No surprises here, as this has already been well guided. Proceeds will be used for capex for its new FPSO projects, repayment of bank borrowings, expansion of its renewable energy and green technology businesses, as well as working capital. Furthermore, the company also announced a 1-for-1 bonus issue, which should not impact any fundamentals of the company apart from increased share liquidity. Barring any unforeseen circumstances, the exercises should be completed by 2QCY22.

Maintain OUTPERFORM, with unchanged (cum-bonus) TP of RM7.35. We made no changes to our valuations, as the contract value for the Atlanta project LOI is well in range with our assumptions. Additionally, our valuations have also already factored-in a 15% share base dilution arising from the rights issue, although this could be subject to change depending on the final quantum/exercise price).

Risks to our call: (i) failure to secure new contract, (ii) project execution risks, (iii) refinancing risks, and (iv) contract termination in existing order-book.

Source: Kenanga Research - 21 Dec 2021