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Yinson Holdings Bhd
(Sept 29, RM3.31)
Downgrade to “sell” with target price of RM2.85:
Yinson reported its first half of financial year 2015 (1HFY15) core net profit of RM61.0 million, which was within our and consensus expectations, accounting for 51.3% of our and consensus full-year forecasts. Both earnings before interest and taxes (Ebit) for the second quarter (2QFY15): 11.3%, 1QFY15: 8.3%, 1HFY15: 9.8%, 1HFY14: 6.1%, 1HFY15: 9.8%) and earnings before interest, taxes, depreciation and amortisation (Ebitda) for 2QFY15: 19.2%, 1QFY15: 15.9%, 1HFY15: 17.5%, 1HFY14: 7.7%) margins remained within our expectations (FY15F Ebit: 9.6%, FY15F Ebitda: 18.2%), lifted by contributions from its floating production storage and offloading (FPSO) business.

Our channel checks suggest that Yinson could secure a new FPSO contract as soon as 2HFY14. If so, it will be a major catalyst as it corroborates with our investment theses which are: i) Fred Olsen’s acquisition would enhance Yinson’s branding and engineering capabilities, enabling it to secure jobs outside of Vietnam; and ii) Yinson is in a good position to win new mid-sized FPSO contracts.

Yinson is studying the disposal of all three non-core businesses and targets to complete the divestment next year. We are delighted with this move as: i) the divestment will improve Yinson’s balance sheet because the trading division has huge borrowings, ii) the disposal capital can be used to fund potential FPSO projects or be paid out as a special dividend, iii) Yinson will become a pure O&G play, and iv) overall group margins will improve.

While the company has yet to finalise the valuation method for this disposal, we understand the non-core assets’ book value is in the range of RM150 million to RM200 million.

We make no changes to our earnings estimate. Note that we have already assumed that Yinson would complete the sale of one of its FPSOs (Petroleo Nautipa) to BW Offshore by late-3QFY14.

Risks include: i) inability to clinch new contracts in the medium term, ii) unexpected overruns resulting in lower profitability, iii) oil prices declining below US$80 (RM261) per barrel, resulting in  fewer production activities and iv) cancellation of existing contracts, although chances of this happening are low.

If Yinson secures a new FPSO contract this year (our base-case assumption), investors with a longer-term view could price in the potential earnings enhancement in its FY17F earnings.

Assuming if the company secures a RM1 billion to RM2.6 billion contract by end of this year, it could easily double the company’s FY17F earnings. Hence, the stock could trade higher to our implied FY17F target price of RM3.80 to RM4.00, based on 20 times FY17F price-to-earnings ratio (PER).

Our target price remains unchanged at RM2.85 but we downgrade the stock to “sell”. We advocate investors to switch to Bumi Armada as we foresee outperformance by Bumi Armada from a valuation standpoint as the stock is merely trading at 16 times one-year forward PER vs Yinson’s 29.4 times. — UOB KayHian, Sept 29


This article first appeared in The Edge Financial Daily, on September 30, 2014.

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