YINSON’s 1QFY24 results tracked our expectations but trailed consensus’ estimate. Overall results were commendable, on the back of steady EPCIC progress, and as FPSO Agogo’s maiden contribution kicked in. After a slight delay, FPSO Anna Nery finally achieved first oil in May, with its charter income to boost upcoming quarters. We maintain our forecasts, TP of RM3.65 and OUTPERFORM call.

1QFY24 within our expectations. Its core net profit of RM180m came in at 30% and 22% of our full-year forecast and the full-year consensus estimate, respectively.

Propped up by Agogo’s maiden EPCIC profits. YoY surge in profit was primarily driven by higher EPCIC profits, mainly propelled by maiden contribution from FPSO Agogo. To a lesser extent, steady progress on FPSO Maria Quiteria and FPSO Atlanta helped as well.

The EPCIC profits more than offset drag arising from: (i) lower recognition of profit from FPSO Anna Nery as the project reached the tail-end of completion, (ii) surge in finance costs due to higher interest rates and drawdown of loans to fund EPCIC works of FPSO Anna Nery and FPSO Maria Quiteria, (iii) higher taxes following implementation of global minimum tax of 15% for multi-nationals, and (iv) spike in personnel costs mainly due to expansion of Yinson’s workforce in Brazil.

The renewables segment remained loss making as YoY PATAMI losses more than doubled to RM17mn. The company attributed this to higher operational overheads to drive future growth.

QoQ weakness at the production segment. Sequential profit contraction was largely attributed to weakness at the production segment. This was due to: (i) less working duration for the FPSO fleet by 3 days, and (ii) 4QFY23 included contribution from FPSO Adoon before its contract expiry.

Key takeaways from YINSON’s results briefing include :

1. FPSO Anna Nery finally achieved first oil in 7 May 2023 and will commence its 25-year time charter contract with Petrobras in 2QFY24. This is expected to boost the group’s quarterly revenue and PATAMI by RM200m and RM75m, respectively.

2. YINSON has invoiced Petrobras for USD24m in mobilization fees for FPSO Anna Nery. Due to accounting requirements, this amount shall be recognized throughout the charter tenure. This translates to quarterly recognition of USD200K for the next 25 years from Jun CY23.

3. YINSON may recognize lumpy stand-by charter income amounting to 90% of full-time charter rates for FPSO Anna Nery in subsequent quarters. This is to compensate YINSON for the delay during the period following provisional acceptance of the vessel (mid-Nov CY22) and start of first oil. YINSON’s application is currently pending approval by Petrobras and finalization of documentation.

4. YINSON plans to connect its Nokh solar power plant to the electricity grid by August which is expected to contribute quarterly revenue and EBITDA of RM60m and RM12m, respectively. As a result, this will finally lead to EBITDA turning around at the renewables segment.

Earnings growth traction sustains. New FPSO projects on Yinson’s radar include Total Energies’ Maka (Suriname), BP’s Block 31 SE-PAJ (Angola), and Petrobras’ Albacora (Brazil). In particular, for Block 31 (estimate start: mid-CY24), Yinson has entered into exclusive negotiations with BP. To fund these new projects and to diversify risks, the group may likely divest minority stakes in its existing FPSO assets. Nevertheless, in the immediate term, we expect earnings in the upcoming quarters to be propped by: (i) steady construction profit from FPSO Agogo, and (ii) commencement of FPSO Anna Nery’s time charter contract as detailed above. Additionally, earnings from Nokh solar plant may also flow in following its planned connection to the electricity grid.

Forecasts. We maintain our forecasts at this juncture pending finalization of: (i) Petrobras’ approvals for FPSO Nery’s stand-by charter income and mobilization fees, and (ii) Nokh’s actual connection to the grid.

Maintain OUTPERFORM, with an unchanged SoP-TP of RM3.65. Note that our valuations have also factored in our inhouse 4-star ESG rating (refer to page 5 below).

We continue to favour YINSON due to: (i) its diversification into renewable energy (RE) and green tech ventures that will translates to earnings growth potential, and enhance its ESG profile, (ii) it currently being the sole contender to supply and operate an FPSO for BP’s Block 31 SE-PAJ project at Angola, and (iii) strong earnings visibility and growth – underpinned by large outstanding order book of USD22.3b with contract tenures that stretch up to 2048.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) regulatory risks and uncertain returns for RE investments that are mainly focused in emerging markets (i.e. South America, India) and (iii) project execution risks including cost overrun, delays and downtimes for FPSO assets.

Source: Kenanga Research - 26 Jun 2023