KUALA LUMPUR (Nov 10): MISC Bhd’s (KL:MISC) proposed RM3.03 billion investment in Yinson Holdings Bhd (KL:YINSON) would increase its financial risk, even under a structure designed to keep Yinson’s substantial debt off the shipping group’s balance sheet, CGS International said.
MISC plans to finance about three-quarters of the investment through new borrowings, amounting to RM2.27 billion, with the remainder funded internally.
CGS maintained its “reduce” recommendation or equivalent to “sell” on MISC with a RM7.58 target price, the second lowest among all 16 analysts tracking the counter, as the research house warned that Yinson’s heavy gearing leaves shareholders particularly exposed to project execution risks.
“Yinson is very highly geared, and its operational execution needs to be almost perfect for its shareholders to secure positive returns,” the research house said in a note dated Monday (Nov 9).
“We believe that MISC is keen on a stake in Yinson because it feels somewhat stuck in its offshore business in terms of the scale and geographical diversity of its contracts, customer reach, and support bases.”
On Friday, MISC, Yinson’s founding Lim family and the Employees Provident Fund (EPF) proposed to take Yinson private at RM2.50 a share.
Buying the remaining 55.2% stake would cost RM4.03 billion, of which MISC would contribute RM3.03 billion. Upon completion, MISC and the Lim family’s investment vehicle would each hold an effective 41.5% stake in Yinson through the acquisition vehicle, while EPF would retain about 17.1%.
The transaction is expected to be completed in the second half of 2027, subject to shareholder, court and regulatory approvals.
CGS put Yinson’s net gearing at 1.1 times as at July 31, rising to 3.1 times under its assessment if perpetual securities and redeemable convertible preference shares (RCPS) were reclassified from equity to debt.
The research house argued that even that financial structure could amplify returns from future contract wins, but it also “accentuates the risk to shareholders”.
A slowdown in awards for floating production, storage and offloading (FPSO) vessels could also delay those gains, the research house added, while also questioning whether paying cash was the best way for MISC to expand its offshore business.
“If MISC was concerned about the FPSO business risks, we think MISC … ought to have injected its existing offshore assets into Yinson in exchange for shares, rather than pay RM3 billion in hard cash,” it said.
Alternatively, MISC could dispose of its offshore business and focus on its lower-risk shipping charter operations, CGS argued.
While the research house acknowledged that MISC plans to have greater scale within the industry, individual FPSO projects, however, still require substantial capital and complex technical capabilities. CGS said those commitments could compete with MISC’s need to replace ageing vessels as environmental requirements tighten.
According to the research house, MISC has said it does not intend to provide further funding to Yinson, whose future growth would need to be self-funded.
CGS had downgraded MISC from “add” to “reduce” in August when the potential Yinson investment emerged. Its latest report maintains that cautious stance, although stronger-than-expected crude tanker rates could support MISC’s near-term earnings.
In that report, CGS warned that the Yinson investment could trigger a repeat of the sharp share-price correction MISC experienced from mid-2024 amid expectations over abandoned plan to combine its offshore business with Bumi Armada Bhd (KL:ARMADA). It cited Yinson’s high gearing, costly redeemable convertible preference share structure and slow FPSO contract wins as concerns.
Most analysts tracking MISC nevertheless remain bullish. Based on Bloomberg data, 10 of the 16 analysts have “buy” recommendations, five have “hold” calls and CGS has the sole negative recommendation. The average 12-month target price is RM9.02. MISC shares were traded unchanged at RM8.01 as of 10.27am on Tuesday, giving the group a market capitalisation of about RM35.8 billion.