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

IN 2014 — the year of the big oil price crash — Lim Chern Yuan, then 30 years old, was appointed as group CEO of Yinson Holdings Bhd (KL:YINSON). This was when the group was just three years into its oil and gas (O&G) pivot.

Despite the prolonged downturn, the son of Yinson founder Lim Han Weng steered the group through a high-flying decade, to operate what is now one of the biggest floating production storage and offloading (FPSO) businesses in the world with 18 global offices.

In his second interview with The Edge, Chern Yuan — better known as CY — also explains why Yinson still wants to grow its FPSO footprint despite having secured a comfortable position with a firm charter contracts backlog of more than US$19 billion (RM86 billion) in hand.

The occasional diver, who turns 40 this year, has a new adventure in hand: to lead Yinson in its energy transition journey, with ambitious goals for the renewable energy (RE) sector that it pivoted into five years ago.

Below is an excerpt from the interview.

The Edge: With your three deliveries nearing completion, you are now looking for even more new opportunities. Has your appetite [on the number of projects] changed?

Lim Chern Yuan: We’re very excited this year. We’ve proven that we can take on successive projects at the same time. Of course, we learnt a lot in that process.

I think we are in a sweet spot. We’ve done a lot of refinancing, we sit on a lot of cash today to take on new projects, and we have the team coming out from all of our projects this [coming] year. We’re at the end of the capex cycle, so we’re quite happy to see cash flow coming in; the market is hot, we can tell clients we can reliably deliver more FPSOs for them.

In the past, you did a rights issue on top of refinancing. Looking ahead, should investors expect a similar process?

I guess investors have the view that the company is in good shape, [that] it should pay dividends. We want to grow the business.

We can recycle capital [by selling some equity in the business units] and pay some dividends … and I think the whole idea was [to] find external capital to fund that [growth]. And we’ve done it before [via equity selldown in the specific business units].

If you ask me, will we need [another] rights issue to grow? The answer is no. We have a US$23 billion backlog. We’re close to about US$1 billion [earnings before interest, taxes, depreciation and amortisation (Ebitda)]. I think we have enough levers to push [and] pull, and really drive future growth without a cash call.

Could you tell us more about your plan for the spin-off of your FPSO business?

I don’t think it should be called a spinning off or IPO [initial public offering]. It’s called ‘unlocking of value’. The plan was always to refinance and be in a very solid cash position. The second step is to look at growing the FPSO business, and perhaps unlock value in that process.

I hope we can streamline [our plans and] announce them by the end of the year. Spinning off, it seems like you’re just selling off. It’s not really that. It could be about bringing new capital in through listing, finding project partners to take on project risk … There are a lot of ways to look at it.

Investors may be expecting Yinson to provide a stable earnings stream with long-term contracts in hand. But from what you have said, your capex cycle will continue to fluctuate ...?

Our investors don’t mind growth if they don’t come up with the capital. Our business is very much like a yield business … We think we have reached a critical mass with the nine FPSOs, where the free cash could be substantial enough to then fund the equity in your next asset.

Yinson’s model is not just to be happy with its nine FPSOs for the next 20 years, where earnings are stable?

We have our [Yinson] bonds if you do want your yield, if you don’t want the capex [fluctuation].

If we do not pick up the projects now where the risk-reward is at its best ever [currently], what happens is we lose that opportunity. Doing an FPSO project today is the same as doing it when [times are] bad, but with double the returns. We should be pushing ourselves to take on the good projects now. One day, oil prices may go down … That’s when we harvest the fruits of our labour.

So as long as the market is attractive, will you continue to pursue growth?

I do believe O&G is a cyclical business ... the whole business model is very simple. We should be focusing on making sure the next asset is a better asset, averaging higher [returns]. Today, it’s even more remarkable. There are zero bidders in some projects — that’s why they are getting delayed.

We just need to monitor where supply is. Interest rates going down will increase supply for sure. So, if rates go down, we can refinance again and cash out more. We have to be adaptable in our business strategies.

We heard that in some projects, you have done away with your usual practice of having a termination clause. Is that the case?

We have not made any changes on that, across the board. If we start taking risk on termination clauses, banks will not fund it. [Even if] banks fund it, [it will be] on your balance sheet — meaning it’s a recourse loan. It will not be a non-recourse loan [where lenders can only seize collateral specified in the loan documents and cannot go after the borrower’s other assets]. It stops the strategy of having us recycling capital.

As there are termination clauses to protect your company, what could be the project risk?

The real risk is never in operations, it is always in the construction. Every day, we delay [costs] US$1 million [in running costs]. With bigger capex, it will be bigger. Generally, [when you are] on time, you can be a bit off-budget. But when you’re off time, you’re never on budget.

Your RE venture is not just a step to offset your carbon footprint?

Definitely it’s a serious venture. We don’t commit 30% of our equity into losses, right? And our RE [segment] is definitely cash flow positive, we produce US$40 million of Ebitda. You cannot look at energy in silos anymore … Yinson is right in the middle of the energy transition. We believe that 10 years from now, being in the energy business, [the transition is] going to transform the company in a big way.

Your family actually bought into Icon Offshore Bhd. Is it just a coincidence that this is happening at the same time as plans to unlock value in your FPSO business?

It’s not coming to Yinson (laughs). That’s all I can say. Yinson did not buy it. It’s a family acquisition. But the O&G services market is hot. This peak [of the O&G business cycle] is [going to be] bigger than the last one.

Does the family have OSV (offshore support vessel) business as well?

We don’t do OSV. But there’s a shipping business on the commodities side.

Are you comfortable with your cash level? But your finance cost is rather high…

The base rate of US dollar [debt] is 5.5%. Equity risk [is around] 4%. No matter what, you are going to get 9.5%. It’s likely about 7% [for ringgit debt]. A lot of people look from a ringgit angle. We are a Malaysian-owned company, but a US dollar-based business. The price is the price, you can’t run away from the price.

As the business grows, borrowings will also rise in tandem. Is that something you are comfortable with?

Debt size growing? Yes, we’re comfortable. First of all, it’s non-recourse. If you take out the non-recourse borrowings, I think when we deliver our assets, our gearing will be like 0.2 to 0.3 times (at end-April, Yinson’s net gearing was at 1.6 times, and 0.8 times with non-recourse borrowings excluded).

Secondly, we have the cash flows. It’s all pegged to the order book. Seventeen-year average lifespan of contracts, net debt to Ebitda four to five years … I think that’s actually a very comfortable position. That’s how we look at it.

So you definitely do not agree with the perception that Yinson could be walking on eggshells due to its debt size.

We’ve gone through [project] terminations three times, right? We got paid. So actually the NPV (net present value) of the projects improved. We also went through two [market] cycles and we’ve never posted a loss.

When [this is] just one of the many investments that somebody does, they don’t spend time looking into the business. Whereas we’re investing big, big time into [FPSOs]. We have one mindset — we cannot lose. We run every project like it’s our last one.

And I think the beauty of the business is the debt is high, and you need to sometimes think about the logic of things. A lot of people have said that, ‘Hey, high interest rate, don’t put debt’.

I really don’t understand that logic. If your projects can take a high interest rate, you should do them now because rates will not stay high forever. When rates go down, you refinance — that’s a lot of margin that you can take. For us, every 1% [reduction in rates] is US$40 million to US$50 million down to the bottom line in savings. Actually, there’s more risk in taking assets during low interest rates, because when rates go up, then you have a problem.

It’s like when the cycle is low, you sell. It just doesn’t make sense. You should be buying when there are a lot of sellers, and you should sell when things are good. 

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