Our recent analysis of the Sankofa FPSO led us to be more comfortable with  counterparty/excution  risks,  and  we  also  understand  Yinson  is bidding for mid-sized contracts. Hence, we upgrade our call to BUY and our  TP  to MYR4.50  (from  MYR3.05),  66%  upside.  It  deserves  premium valuations  given  further  contract  wins,  and  proven  execution led  by  a USD4.2bn firm orderbook and >10 years average firm contract tenure.

Sankofa  floating,  production,  offloading  and  storage  (FPSO)  is  a low  concentration  risk.  In  Jan  2015,  Yinson  secured  a  USD3.8bn FPSO  contract  from  ENI  (ENI  IM,  NR)  to  develop  the  Sankofa  oil/gas field offshore Ghana (Sankofa FPSO). ENI is a client with robust balance sheet (low  gearing) and  strong shareholder support.  ENI  indicated  in its 4Q14  briefing  that  it  would  further  improve  its  balance  sheet  after  aEUR2.5bn  capex/opex  reduction  planned  for  2015,  which  will  lower production cost to USD8/barrel (bbl)  and exploration cost to USD2/bbl.Also, in  the  event of a  force majeure  or early termination of the FPSO, we learnt that  the payout in the contract terms  is  sufficient to safeguard the  contract’s  net  present  value  (NPV)  and  cover  Yinson’s  loan obligation.  We  are  more  comfortable  with  the  project’s  execution  and deem  ENI  as  low  counterparty  risk. We  increase  the  Sankofa  FPSO’s EBITDA  margins,  bringing  it  closer  to  management’s  expectations  of 80%. The FPSO will likely double Yinson’s earnings from FY18 onwards.

More  to  offer.  Yinson  is  still  actively  bidding  for  mid-sized  FPSO contracts.  According  to  sources  including  Upstream,  these  include projects in Indonesia (Ande Ande Lumut and Madura BDA) and Vietnam. We  estimate that  these are mid-sized contracts with firm tenures up to 10 years and contract sizes up to USD500m. According to SBM Offshore (SBMO NA, NR),  while worldwide  FPSO contracts available seem fewerthan  2014,  this  is  offset by  an  increased  scarcity  of  active bidders  like Yinson.  Yinson  could  also  secure  more  contracts  related  to  ENI,  whocould monetise non-associated gas reserves in the same acreage.

Upgrade to BUY,  SOP  TP MYR4.50  (stress  test  scenario MYR3.55) based on DCF for FPSO and P/E for logistics/trading.  We refine our SOP after  lifting  Sankofa’s  margins  and future contract wins.  We think  it  stilldeserves  premium  valuations  given  further  contracts  and  proven execution.  Our  BUY  is  supported  by  a  USD4.2bn  firm  orderbook  (from USD1.5bn) and >10 year average firm contract tenure (from six). Despite retaining our earnings forecasts to account for USD and opex volatility, a contract  win could lead  to  earnings  upgrade  and fund raising. Gearing could rise to the maximum of 2.5x, given strong cash flow generation.