This article first appeared in The Edge Financial Daily on June 28, 2019 - July 4, 2019
Yinson Holdings Bhd
(June 27, RM6.10)
Downgrade to hold with a higher target price of RM6.14: Yinson Holdings Bhd’s core net profit for the first quarter of financial year 2020 (1QFY20) fell 63% year-on-year (y-o-y), mainly due to the cessation of the floating production storage and offloading (FPSO) Allan contract at end-January 2019, and the 141% y-o-y rise in perpetual securities coupons as the outstanding perpetuals balance rose from RM632.5 million as at April 30, 2018 to RM1.6 billion as at April 30, 2019. Tax expense also rose y-o-y, but depreciation expense fell y-o-y as the depreciation on the FPSO Allan ceased because the vessel is now being converted into FPSO Abigail-Joseph for redeployment to Nigeria.
Yinson is currently working to complete the conversion of two vessels into FPSO Helang (for deployment in Malaysia) and FPSO Abigail-Joseph; both vessels may start earning revenue from November 2019F, but for simplicity, we have assumed a Feb 1, 2020F start date.
Upstream reported recently that Yinson has likely secured the Marlim-1 FPSO contract award from Petrobras, with the Marlim-2 FPSO going to Japan’s Modec. Although Modec had bid lower time charter (TC) rates for both vessels, Modec has too many projects on hand and decided to just bid for one of the two Marlim deals. According to Upstream, Yinson had bid a TC rate of US$750,000/day, but Petrobras renegotiated it down to US$709,870/day. With capex estimated at US$1.6 billion, we estimate project internal rate of return (IRR) of 11.7% for the 25-year firm period. Meanwhile, Yinson is also bidding for 1) the Pecan FPSO project in Ghana against SBM Offshore, which we think Yinson is keen to secure as it is already operating the FPSO JAK in Ghana, 2) the Parque das Baleias project in Brazil which may be put up for retender, and 3) the Limbayong project in Malaysia in a joint venture with MISC Bhd. Yinson guided previously that it can accommodate two additional large projects without issuing new ordinary shares; however, we believe Yinson needs to issue another US$280 million in perpetual securities to fund the equity requirements of the Marlim-1 and Pecan projects, assuming 70% equity interest and 30% equity funding for both.
We have reflected the value of the Marlim-1 and Pecan FPSO contracts in our sum of parts (SOP) valuation, which Yinson’s share price now reflects. Upside risks include the potential for up to three new contract awards. Downside risks include project execution challenges in Brazil which Yinson has never operated in before, and the potentially messy restructuring of Ezion which may take a lot of management time, if Yinson seals the deal to buy it. — CGSCIMB Research, June 26