This article first appeared in The Edge Malaysia Weekly on January 20, 2025 - January 26, 2025

ENERGY infrastructure and technology company Yinson Holdings Bhd (KL:YINSON) is considering a spin-off and separate listing of its floating, production storage and offloading (FPSO) business, which is parked under Yinson Production Offshore Holdings Ltd. Yinson Production recently secured a US$1 billion (RM4.48 billion) investment from investors in Abu Dhabi, Canada and Asia, which it described as “pre-initial public offering (IPO) growth capital”.

Asked to comment, Yinson group CEO Lim Chern Yuan says the potential IPO of its FPSO business is one of the options, adding that the group is also looking at other alternatives.

These include forming an infrastructure trust (bundling operational assets into a portfolio company) or selling down its assets.

“The target for monetisation will be around three to five years,” he tells The Edge.

“With this growth capital, we hope the Ebitda (earnings before interest, taxes, depreciation and amortisation) of the FPSO business will grow by an additional 50% to something closer to US$1.5 billion.

“Aside from the IPO, we can also monetise [the business] through creating a yield company bundling in operational assets [akin to an infrastructure real estate investment trust], or selling down of assets to accelerate return of equity.”

This is not the first time Yinson has spoken about its plan to spin off its FPSO business into a separate listing. In 2022, the group had revealed that the potential IPO of its FPSO business is part of its medium- to long-term strategy to ensure that it is prepared and fit for future growth.

Last week, Yinson Production made one of the region’s largest structured equity issuances through the issuance of redeemable convertible preference shares (RCPS) that can go up to US$1.5 billion within 24 months.

For the deal, Yinson roped in Abu Dhabi Investment Authority (ADIA) and funds managed by British Columbia Investment Management Corp (BCI), based in Canada, and RRJ Capital Group, based in Asia, to subscribe US$1 billion of the RCPS.

The capital injection is primarily to fund the growth of the group’s FPSO business as it eyes further projects. Yinson Production has a fleet of 10 FPSO vessels located in North America, Brazil, South America, Africa and Asia.

This comes as a surprise considering that Yinson’s total borrowings stood at RM19.3 billion as at Oct 31, 2024.

Lim explains that most of the group’s debt is project financing loans and “already non-recourse”, which minimises the risk of these loans to Yinson’s liquidity. “Using RCPS proceeds to repay project financing loans would not create value for Yinson. Nonetheless, the infusion of this equity significantly changes our leverage profile. When adjusted for the new equity infusion, our net debt to equity halves to 0.7 times from 1.7 times.”

The RCPS does not have an expiry date and Yinson Production can call for the conversion anytime. Free warrants will also be issued together with the RCPS.

The RCPS can be converted into new ordinary shares in Yinson Production if there is an IPO, of which the RCPS holders can partly convert their units to Yinson Production shares before the IPO. After the IPO, RCPS holders can convert the Yinson Production shares to ordinary shares anytime. The conversion rate of the RCPS units will depend on the IPO issue price that will be determined later.

The RCPS is priced at US$1 apiece. The issued share capital of Yinson Production is US$1 per share.

Following the conversion of the RCPS and warrants, Yinson’s stake in Yinson Production would be reduced to 65.48% from 100%. This will give RRJ a 13.81% stake in the unit, while BCI will have 12.08%, and ADIA, 8.63%.

The RCPS carries an annual dividend rate of 12.95% to 13.5%, which the group says is “justifiable”, after taking into consideration Yinson’s FPSO mezzanine financing, secured in 2023 with interest ranging from 12.5% to 13.5% per year.

In a Jan 16 report, CGS International says the RCPS cost “looks high” and the onus is on Yinson to execute and list Yinson Production.

“We were surprised by the high cost of the RCPS, which will be at a minimum of 12.95% per year in Option A if Yinson Production pays the coupon wholly in cash, or an equivalent return of 13.5% in Option B if Yinson Production elects to pay a lower cash coupon of 7.25% and defer the rest.

“We had expected the RCPS issue to carry a substantially lower coupon due to the conversion option but this was not the case, likely due to various reasons including the fact that the RCPS investors do not have an option to call back their capital and because Yinson Production has the right to redeem the RCPS at its discretion,” the research firm notes.

“Despite the high RCPS coupon rates, Yinson claims that new FPSO projects may be able to command an equity internal rate of return (IRR) in excess of 20%, which we think is reasonable as the IRR of FPSO projects can reach mid-teens percentage rates in the current strong market.”

The research house points out that while the capital injection would provide Yinson funds for its future FPSO projects, the downside risk is that the company has committed to significant streams of future RCPS coupon payments.

“Yinson is under pressure to secure the new FPSO projects, secure them at high daily charter rates and at high IRR, execute properly with no cost overruns or delays, and successfully list Yinson Production within five years,” CGS International says, maintaining an “add” call on Yinson, with a target price of RM3.09 per share.

Shares in Yinson closed at RM2.53 last Friday, giving the company a market capitalisation of RM8.1 billion. The share price has fallen by a marginal 1.17% over the past one year.

Lim says the RCPS issuance values Yinson’s FPSO business at US$3.7 billion, which is 2.2 times higher than Yinson’s market value. “The US$3.7 billion valuation is also higher than sell-side analysts’ target price valuations, which currently range between US$2 billion and US$3 billion.”

In a Jan 15 report, Kenanga Research points out that the RCPS deal implies an EV (enterprise value)/Ebitda that is above the peer average, reflecting strong investor confidence in Yinson’s ability to secure more FPSO contracts in the coming years.

The US$1 billion RCPS will be issued in four tranches, of which the bulk of the proceeds of 78% will primarily go towards supporting Yinson Production’s growth, and the remaining US$200 million will be utilised to further expand its renewable energy and green technology businesses, as well as to distribute to Yinson shareholders through share buybacks and/or dividends.

Yinson is proposing to utilise US$60 million for its second Peruvian venture, namely the Majes solar project located in the Arequipa region, about 80km from Matarani, Peru.

The Majes solar project will have a total installed capacity of 130mw, divided into two phases, Majes I (54mw) and Majes II (76mw).The estimated total capital expenditure (capex) for Majes I and II is expected to reach about US$136 million.

“A power purchase agreement for Majes covering 70% of the offtake for 13 years is under negotiation. The first phase of construction commenced in December 2024 and the group is in the process of securing bank borrowings.

Lim explains that the capital injection is to allow the group to capture the FPSO market without any further capital calls from Yinson’s shareholders. It is estimated that the FPSO market is projected to have a capex of US$96 billion over the next five years (averaging close to US$20 billion per annum), which translates into about 60 FPSO opportunities globally.

“For Yinson, this is a key, strategic and timely exercise from multiple angles. The FPSO business is capital-intensive and requires a huge amount of both equity and debt funding.

“In recent times, we have seen our competitors retreat from lease and operate contracts, citing funding as a constraint. With this capital, we could be one of the only FPSO companies that has ready equity capital to fund lease and operate contracts,” he says.

Having said that, Lim says the recent fundraising will allow the group to take on at least one FPSO project with a capex requirement of between US$1 billion and US$2 billion per year.

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