New FPSO contract win could be a catalyst for Yinson

Yinson Holdings Bhd
(Feb 17, RM7.09)
Maintain outperform with a higher target price (TP) of RM8.05:Last week, news sources reported that Yinson Holdings Bhd could be “weeks away” to securing the floating production storage and offloading (FPSO) Parque das Baleias contract in Brazil. Recap that Yinson emerged as the only bidder after other competitors were disqualified. We believe this could be a much needed catalyst for the stock, with our model assumptions suggesting that the award could contribute to an incremental fair value (FV) of RM2.09 per share. We maintain “outperform” with an increased TP of RM8.05.

Last week, Upstream reported that Yinson and Petrobras are close to agreeing terms for the FPSO in Parque das Baleias, off Brazil. The article further suggested that Petrobras approval of a contract is “just weeks” away.

Yinson was left as the sole bidder for the contract after the leading bidder Bluewater ran into financial difficulties. It was reported that Petrobras ultimately decided not to do a retendering despite the lack of competition, as this would result in the project being further delayed. This would be Yinson’s second FPSO in Brazil after Marlim 2 last year. The contract tenure is likely to be for a 22.5-year charter, with the FPSO likely to have a capacity for 100 million barrels of oil per day and five million cubic metres of gas per day.

We believe that the successful award of the contract could serve as a much needed catalyst for Yinson. Based on our model assumptions, the contract should contribute an additional FV of RM2.09 per share, based on the assumptions of: i) US$1 billion capital expenditure; ii) internal rate of return of 15%; iii) discounting rate of 7%; and iv) Yinson’s stake of 80%. Finance lease accounting would also mean that profit recognition could start soon after the contract award.

Yinson is also the frontrunner for two other FPSO bids: i) Pecan project, off Ghana, competing against SBM Offshore; and ii) Limbayong development, off Sabah, in partnership with MISC Bhd. We believe further contract wins are highly likely, given Yinson’s proven project delivery and execution track record, as well as competitiveness in bidding, although delays in both these projects could mean a contract award date later in 2020 or 2021.

We maintain “outperform”, with a higher sum-of-parts (SOP)-based TP of RM8.05 — implying 24 times forward price-earnings ratio. We raised our SOP-TP to RM8.05 (from RM7.75 previously) after factoring in a successful Parque das Baleias contract award. Note that our valuations have also priced in further contract win beyond this, based on half the valuations assumption for the Brazilian projects.

Risks to our call include: i) project execution risk; ii) weaker-thanexpected margins; iii) termination of contracts; and iv) failure to land new contracts. —Kenanga Research, Feb 17