This article first appeared in The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

THE infrastructure business is a long-term game, requiring years of gestation to deliver quality assets that churn streams of steady returns that sometimes span decades.

This gestation period was apparent at Yinson Holdings Bhd (KL:YINSON) in the last three years as it focused on delivering its three latest bespoke oil and gas (O&G) upstream production vessels. Two are coming online this year and another next year, marking the end of its billion-dollar capital expenditure (capex) cycle that will lift its fleet size to nine vessels. The segment’s contractual revenue, excluding extension options, now stands at US$19.1 billion (RM85.9 billion), from just over US$10 billion in 2020.

But instead of resting on its laurels, Yinson is already “aggressively” bidding for more of these capex-heavy projects, says group CEO Lim Chern Yuan.

The main reason, he explains, is that the market for these vessels — known as floating production storage and offloading (FPSO) units — is even hotter now than when it bagged three consecutive jobs from 2021 to 2022.

“Because of where energy prices are, demand [for FPSOs] has grown but supply [the number of companies that can deliver FPSOs] has not grown.

“When I thought having one bidder in a project was a very good position to be in [previously], today there are no bidders in some projects. It’s an even more remarkable situation,” says Lim, who is better known as CY, in an exclusive interview with The Edge. “That’s the opportunity we are after.”

Yinson’s ambition to further expand the capital-intensive business coincides with other plans. It is raising dividend payouts from this year, and concurrently beefing up its renewable energy (RE) asset base from 1gw now (see “Taking the lead in green ventures” on Page 58).

All this time, the group’s headline leverage has exceeded that of traditional infrastructure companies such as conventional power plant developers. In total, it has delivered seven FPSOs in the last 10 years — three in Africa, three in Brazil and one in Malaysia. It has nine such vessels in total.

To CY, there is a rationale behind the rapid growth. With the three latest FPSOs, Yinson believes cash flows from its asset base will finally be enough to fund new projects without a cash call, on top of servicing its debts and meeting other financial obligations (including to holders of RM1.94 billion perpetual securities at end-April). In 2022, it undertook a RM1.19 billion rights issue to support its current projects.

With more FPSOs on the radar, Yinson’s capex cycle could see a new peak in the coming years. Already, some analysts have pointed out that the group may opt for further fundraising, especially for its RE venture. Earlier this year, Yinson undertook a private placement of 120 million shares, or 4.1% of its enlarged share capital, to raise RM283.2 million mainly for its RE push, for which Kumpulan Wang Persaraan (KWAP) subscribed for 50 million shares.

“If you ask me, will we need [another]rights issue to grow [the FPSO business]? The answer is no ... Today, we are in a much better position than we were 10 years ago [in terms of] balance sheet and human capital, and in a better market than 10 years ago.

“The whole business is simple — we just need to build good projects on top of good projects. We don’t build based on speculation. Each asset must be profitable ... The next asset should be better, averaging higher [returns overall],” CY says.

With higher dividends expected from this year on, options to unlock value from its nine assets are still being looked at, although CY says it is more strategic than anything else. In March 2022, the group announced plans to “explore a broad range of options” such as an initial public offering (IPO) or strategic partnership opportunities.

“We have about US$400 million cash ... Do we really need to do a transaction [to unlock value]? The answer is no ... And we can easily fund our new project with this [cash in hand],” he says.

“But is it the right time to look for a strategic investor? Yes, we’d like to be in a position to look for growth partners, not where we need to find somebody [to support us].

“The rationale [for unlocking value] is always to grow the business, and yet be able to increase dividends and share buybacks … It’s a balancing act between growth and returns.”

Over the years, Yinson has “recycled” its capital by selling down equity in its assets to fund newer and bigger projects. For example, its FPSO John Agyekum Kufuor, named for a former president of Ghana, is 26%-owned by a Japanese consortium whereas the FPSO Anna Nery, named after Brazil’s first modern nurse, has Japanese trading group Sumitomo as a project partner with 25% interest.

At present, five of its larger FPSOs are still wholly owned. “Immediate dilution is always there [when unlocking value for growth] … but we get a slice of a bigger pie,” CY says, reiterating that Yinson will remain selective in its project bids.

The leeway to pare down equity in its projects relies on good project delivery — on time and within budget. The completed projects also have a non-recourse loans structure, where lenders are entitled to specific collateral and cash flow, and not the other assets.

Yinson further highlights that during asset construction, interest charges on the project loan are reflected in its profit and loss statement — but it is actually paid back only when the assets are delivered and operational.

The non-recourse financing is a common feature for infrastructure assets. Having said that, Yinson certainly does not shy away from using leverage. It has RM16.56 billion in total borrowings, resulting in a 1.6 times net gearing as at end-April 2024.

Its gearing level is similar to peers such as SBM Offshore NV, which has a fleet of 21 FPSOs (Yinson’s net gearing would be 0.8 times if adjusted to exclude non-recourse loans as at April).

That being so, conventional infrastructure companies such as power plant developers are not as highly geared and some could turn net cash when non-recourse loans are excluded. The counter-argument is that such players are not in a similar growth phase as FPSO players in the current operating landscape.

With more than half of its debt maturing in the next two to five years, Yinson cannot afford to have any hiccups in its delivery. Things are on track for its three vessels — the Atlanta (first oil expected this month), the Maria Quitéria (with first oil date brought forward to 4Q2024, from 1Q2025) and the Agogo (first oil expected by January 2026).

In the financial year ended Jan 31, 2024 (FY2024), Yinson’s finance costs rose 67% year on year to RM963 million from RM577 million, ahead of the 64% increase in net profit to RM964 million, from RM589 million. This is before deducting RM135 million in perpetual securities distribution paid that year.

If its RM1.94 billion perpetuals as at April were categorised as debt, Yinson’s net gearing, including non-recourse loans, would be elevated to 2.3 times. In FY2024, it recorded RM2.83 billion in negative net operating cash flow.

The group argues this is because its FPSOs are categorised under finance lease in the IFRS accounting treatment, which records huge profits in the initial stage of vessel construction but records huge interest costs during the final days of construction — whereas, operationally, projects are funded by its financing during construction, and repaid by Yinson only when projects are operational and removing oil or gas from the seabed.

Thus, the group provides alternative cash-flow statements that recognise its FPSOs under operational lease, and guides that its cash flow is positive RM1.62 billion in FY2024, according to its analyst presentation (scan the QR code to read a previous article by The Edge on Yinson: “Never a lazy balance sheet for Yinson”).

“Our banks are comfortable, our bondholders are comfortable,” says CY, when asked about its growing debt level. The group works with 36 principal bankers and financiers, according to its 2024 annual report. “First of all, [the debts are mostly] non-recourse. Second, we have the cash flows … 17-year average lifespan of contracts. That’s a very comfortable position.”

Since the pandemic, Yinson’s shares have traded between RM1.83 and RM2.90, and its annual dividend per share has ranged between two sen and three sen (adjusted for bonus issue in 2022), with a maximum yield of 1.6% for those who bought into the counter at its lowest in the last five years. The counter closed at RM2.38 last Friday, valuing the group at RM7.58 billion.

All 10 analysts covering the group have “buy” calls on the counter, with the target price ranging between RM2.94 and RM4.78, and an average price of RM3.67, Bloomberg data showed.

Despite concerns over its high gearing, an investor who bought 10,000 Yinson shares at the start of 2014 (at the tail end of its 2012-2014 rally) would still be in the money, based on the current share price.

To illustrate: For the 10,000 shares, his investment cost would be RM68,700.

The group did a rights issue and share split in 2014, a bonus issue in 2022, followed by another rights issue that year. Assuming full subscription, the total investment cost for the investor would amount to RM135,820. In return, the investor now has 112,000 shares, valued at RM266,560 — based on its last close of RM2.38 — and would have received RM27,740 in dividends in the period.

On the other hand, if an investor had bought into the company at the start of 2020 and fully subscribed for its 2022 rights issue, he would be out of the money by about 8% (assuming the dividends were not reinvested), based on total investment costs of RM76,080, current share price value of RM66,640 and dividends of RM2,800 in the period.

From a family-owned business that started in transport services, Yinson now has shareholders that include the Employees Provident Fund (EPF) (with a 17.65% stake) and KWAP (with a 7.64% stake), according to its latest corporate presentation. Its founder Lim Wan Heng holds 22.08% direct and indirect interest, valued at RM1.58 billion at the time of writing.

“Over the last 10 years, [Yinson] has done two rights issues [in 2014 and 2022] for about RM1.7 billion. After share buybacks and dividends of around RM1 billion, net raised was around RM600 million. That’s around US$150 million.

“With that capital base, we built [a total] asset base of RM29 billion. It’s very little capital in building that asset. You think about the US$22 billion high-margin order book [inclusive of US$3.1 billion extension options]. The assets are all funded now, and we’re just waiting for good delivery and cash flows.

“From an investment perspective, we (the Lim family) as the largest shareholder as well, it has been a very good investment for us with the capital raised, and the way we recycled our capital,” says CY.

The family is also expanding its business empire. Most recently, its Singaporean logistics unit Liannex Corp (S) Pte Ltd acquired a 50.2% stake in offshore support vessel operator Icon Offshore Bhd for RM172.2 million from state-owned private equity Ekuiti Nasional Bhd.

Market observers speculate that Liannex may inject into Icon Offshore its shipping business, which trades commodities, including two million tonnes of coal per year as well as cement, gypsum and anhydrite, which are raw materials for building materials.

As it continues to bid for at least 21 projects, the next five years would see Yinson remaining heavily invested in the FPSO business, at a time when notable agencies such as the US Energy Information Administration (EIA) are making changes to forecasting capabilities in the light of the changing energy supply and demand landscape.

CY, who breaks down his strategies into simple ideas, is clear on one thing: demand for energy. “Our whole model of our business is dependent on the growth of energy demand.

“Ever since I started working [CY’s first role in Yinson was as business development executive in 2005] until today and in the foreseeable future, I can’t see how people will use less energy,” he says.

“It’s not even a clean energy problem that we have; it’s [about] how much energy we can supply for future needs. We are quite excited to be in a period in which we think energy demand is going to skyrocket, and to be able to be part of the energy business and solve issues such as the energy trilemma, using clean energy and transitional fuels [such as gas].” 

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