CIMB Research downgrades Yinson from Add to Hold

AmInvestment Research said Yinson

KUALA LUMPUR: CIMB Equities Research has downgraded Yinson Holdings  Bhd from Add to Hold as the share price has reacted strongly to news that the oil and gas services company was likely to bag Petrobras’ Marlim-1 contract.

In its research note issued on Thursday it said its sum-of-parts based target price was raised to RM6.14 from RM5.90 mainly as it increased the discounted cashflow value of potential contract wins by 23 sen a share.

Yinson’s 1QFY20 core net profit fell 63% on-year, mainly due to the cessation of the FPSO Allan contract at end-January 2019, and the 141% on-year rise in perpetual securities coupons as the outstanding perpetuals’ balance rose from RM632.5mil at April 30, 2018 to RM1.6bil as at April 30, 2019. 

Tax expense also rose on-year, but depreciation expense fell on-year as the depreciation on the FPSO Allan ceased because the vessel is now being converted into FPSO Abigail-Joseph for redeployment to Nigeria.

Yinson is currently working to complete the conversion of two vessels into FPSO Helang (for deployment in Malaysia) and FPSO Abigail-Joseph; both vessels may start earning revenue from Nov 2019F, but for simplicity, CIMB Research have assumed a Feb 1, 2020F start date.

To recap, Upstream reported recently that Yinson has likely secured the Marlim-1 FPSO contract award from Petrobras, with the Marlim-2 FPSO going to Japan’s Modec. Although Modec had bid lower time charter (TC) rates for both vessels, Modec has too many projects on hand and decided to just bid for one of the two Marlim deals. 

According to Upstream, Yinson had bid a TC rate of US$750,000/day, but Petrobras renegotiated it down to US$709,870/day. 

“With capex estimated at US$1.6bn, we estimate project internal rate of return (IRR) of 11.7% for the 25-year firm period,” it said. 

Yinson is also bidding for 1) the Pecan FPSO project in Ghana against SBM Offshore, which Yinson is keen to secure as it is already operating the FPSO JAK in Ghana, 2) the Parque das Baleias project in Brazil which may be put up for re-tender, and 3) the Limbayong project in Malaysia in a JV with MISC. 

Yinson guided previously that it can accommodate two additional large projects without issuing new ordinary shares.

“However, we believe that Yinson needs to issue another US$280mil in perpetual securities to fund the equity requirements of the Marlim-1 and Pecan projects, assuming 70% equity interest and 30% equity funding for both.

“We have reflected the value of the Marlim-1 and Pecan FPSO contracts in our SOP valuation, which Yinson’s share price now reflects. Upside risks include the potential for up to three new contract awards. Downside risks include project execution challenges in Brazil which Yinson has never operated in before, and the potentially-messy restructuring of Ezion which may take a lot of management time, if Yinson seals the deal to buy it,” CIMB Research said.