AmWatch - Yinson Holdings : With greater conviction, 18 May 2015

STOCK FOCUS OF THE DAY

Yinson Holdings : With greater conviction           Buy

We upgrade Yinson Holdings to BUY with a higher fair value of RM3.60/share (from RM2.85/share previously), based on our sum-of-parts (SOP) valuation. Our fair value implies an FY16F’s (ending Jan) PE of 25x, a premium above the O&G industry average of 17x. We deem this justifiable due to the strong counterparties for their FPSOs and the potential for earnings to double upon the commencement of the OCTP FPSO in Ghana.

Following a recent meeting with management, we raised our valuation of OCTP as we have imputed a higher IRR of 12.5% as guided by management, vs. our previous assumption of 10%. The OCTP project currently accounts for 48% of our total SOP valuation. Upon the commencement of operations in Sept 2017, the FPSO is expected to contribute to the bottom line significantly, with approximately RM150mil full-year accretion to bottomline. We have accounted for four months contribution from the project for FY18F. FY19F earnings should double that of FY15F.

We are taking a more constructive stance on the OCTP contract. We understand that the execution and counterparty risks appear somewhat low given that its customer, Eni SpA, is one of the largest integrated energy companies in the world. Furthermore, Yinson is well protected by the contract terms between the two parties where the early termination fees would preserve its net present value currently derived from the project.

With a 75:25 debt:equity funding for the project, the group’s net gearing is expected to increase from 0.32x currently to >2x over the next 2-3 years. This would be progressively offset by the strong earnings and cash flows generated from the FPSOs. Yinson’s plan to divest its non-O&G operations by this year would further help pare down gearing levels. Yinson is actively bidding for more FPSO contracts. One such contract is the Ca Rong Do project in Vietnam by Talisman (now Repsol), according to Upstream. The stock currently trades at an FY16F PE of 21x.

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