This article first appeared in The Edge Financial Daily on January 23, 2018 - January 29, 2018

Yinson Holdings Bhd
(Jan 22, RM4.17)
Maintain buy with a higher fair value (FV) of RM5.05: We maintain “buy” on Yinson Holdings Bhd (Yinson) with a higher sum-of parts (SOP) FV of RM5.05 per share (from an earlier RM4.50 per share), which implies a financial year 2019 (FY19) price-earnings (PE) of 17 times. If Yinson secures the charter for the US$1 billion (RM3.93 billion) floating production, storage and offloading (FPSO) for Hess’ TanoCape Three Points project off Ghana by the end of the year, its SOP can be raised further by 35% or RM1.79 per share.

Underpinned with locked-in earnings visibility from an order book of US$4.2 billion (25 times FY18 revenue), the stock currently trades at a bargain 2018 PE of 13 times versus over 20 times for Dialog Group Bhd and Sapura Energy Bhd.

The PetroVietnam-Petronas partnership had terminated the group’s 49%-owned Lam Son FPSO vessel charter with a fee of US$209 million but it is still employing the vessel currently. Assuming an extension by another seven years but at a discount of 40%, we based Lam Son’s net present value (NPV) extension of RM436 million over the seven years on an equity discount rate of 6%. This is conservative as the vessel should enjoy a risk-free rate of 4% given that the vessel’s debt has been fully repaid by the termination fee, while the project’s equity portion has also been fully repaid.

Adding the Layang FPSO’s NPV of RM395 million, assuming a capital expenditure (capex) of US$350 million, following the proposed novation of TH Heavy Engineering’s (THHE) contract with JX Nippon, we expect THHE’s court proceedings (under Practice Note 17 [PN17] status since April last year) on its financial regularisation scheme with its creditors and the completion of the novation to be completed in the second quarter of 2018 (2Q18). 

Our foreign exchange conversion rate has also been lowered to RM4 to US$1 from an earlier RM4.30 to US$1, which has partly offset the impact from the incorporation of the Lam Son contract extension and Layang charter. 

With the excess cash of US$35 million post-full settlement of the Lam Son FPSO debt which was paid off with the termination fee, coupled with US$117 million proceeds from selling a 26% stake in the John Agyekum Kufuor (JAK) FPSO to a formidable Japanese consortium, the group has a massive cash pile of RM1.3 billion (30% of market capitalisation) to secure new FPSO projects.

Regarding the FPSO for Hess’ Tano-Cape Three Points even if Yinson does not secure this new Ghana FPSO project, there are multiple other FPSO charters up for grabs, predominantly in Brazil. 

As the group’s net debt of RM2.4 billion stems mostly from Yinson’s 100%-owned JAK FPSO in Ghana, the group’s gross cash of RM748 million as at Sep 30, 2017 is completely unencumbered. — AmInvestment Research, Jan 22