Yinson’s balance sheet remains sturdy

OVER the past week, Yinson Holdings Bhd has drawn investors’ attention after an entry in an online forum made some allegations about the group’s state of financials.

This comes just a week after audit issues were unearthed in Serba Dinamik Holdings Bhd in late May.

At a glance, Yinson appears to be sitting on an increasingly high debt with a negative net operating cash flow. Meanwhile, more than one-third of its operational profits have been going towards paying finance costs or the interest paid on borrowings. In the latest financial year of 2021 (FY21) ended Jan 31, finance costs were up by 61% year-on-year.

The concern is whether a liquidity crisis could be brewing at the floating production, storage and offloading (FPSO) leasing company.

At the same time, a key question emerges. Why didn’t the major institutional funds among Yinson’s directors and shareholders raise red flags if there are indeed issues with Yinson’s state of financials?

After all, the chief investment officer of the Employees Provident Fund (EPF), Rohaya Mohammad Yusof, sits on the board of directors. The EPF is the single largest shareholder of Yinson, followed by Retirement Fund Inc (KWAP) and insurer AIA Bhd.

In a reply to StarBizWeek, Yinson says that the group’s operational projects have stable and recurring cash flows that would help the group manage its loan repayment schedules effectively.

It adds that the increase in borrowings is driven by new projects, which have debt funding. “The increase in 2017, for example, coincided with the completion of FPSO John Agyekum Kufuor, while the increase in 2020 is attributable to FPSO Anna Nery.

“It is also important to note that although we add debt to our balance sheet while building new FPSOs, the repayment of these loans do not start till assets commence charter and start generating cash flows, ” the group says.

Based on Yinson’s cash flow statement for the 12-month period ended Jan 31, the group recorded a negative net operating cash flow of RM522mil after factoring in working capital changes. A year earlier, the net operating cash flow was positive at RM956mil.

The major reason for the negative cash flow was the presence of a RM2.3bil working capital adjustment for contract assets.

“In 2021, we had two FPSOs under construction that were being accounted for as finance leases, and thus cash flow towards the construction of the assets was reported under operating cash outflows as contract assets.

“Under an operating lease, this would have been recorded as cash flow for investing activities. This is purely an accounting treatment. Excluding the impact of cash flow going towards the asset in construction, we generated a net positive operating cash flow of RM598mil, ” Yinson explains.

The group expects the value of the contract assets to continue increasing until the construction is completed by early 2023. Following which, provided that there are no new projects that are accounted as finance leases, the contract assets value will begin to reduce as the projects start to generate cash.

Once on charter, bareboat payments from the FPSOs will go towards reducing the balance over the tenure of the charter.

Yinson says that its current order book is more than sufficient to extinguish the loans, cover operational costs, taxes and generate free cash flows, in addition to profits for the group.

“The last time Yinson did an equity capital call for a project was when we secured the John Agyekum Kufuor project in Ghana in 2015. Since then, we have completed FPSO Helang and FPSO Abigail Joseph without raising new equity capital. This goes to show that we have managed to fund the equity portion of these projects with internally generated resources, ” the group says.

Responding to a question about the major loan drawdown of RM5.26bil it undertook in FY21, Yinson attributed it to the construction of FPSO Anna Nery, its largest asset to date, for Petrobras.

“The repayment for this will come from the cash flows of the project. FPSO Anna Nery has a charter that will pay US$5.4bil (RM22.18bil) over a tenure of 25 years. Depending on which research analyst you track, capital expenditure (capex) is within the range of US$900mil (RM3.69bil) to US$1.1bil (RM4.52bil), ” it says.

It is noteworthy that despite the massive loan drawdown, Yinson has also repaid RM3.14bil in loans and borrowings in the same financial year.

Yinson’s FPSO charter charges normally consist of two components, namely, the bareboat rate and the operations and maintenance (O&M) rate. The bareboat rate is the lease rate for the asset. Meanwhile, the O&M rate covers all operational costs, repairs, maintenance and insurance over the life of the asset.

“Normal wear and tear of equipment is considered in our O&M rate and calculated based on a thorough understanding of an asset’s life cycle, ” it says.

Amid the scrutiny on its financials, Yinson reaffirms its commitment to continuously strengthen its governance standards.

“Half of our board members consist of independent directors, who are professionals with experience in the public and private sectors. We are also supported by our external auditor, PwC Malaysia, ” it says.

Commenting on the industry, Yinson points out that in recent years, there have been fewer bidders internationally for large FPSO contracts that have a capex closer to US$1bil (RM4.11bil).

In many instances, oil majors have been struggling to find more than two bidders for such large FPSO projects. “The larger the FPSO project, the more technically complex it becomes and the capex is very high, hence requiring a good balance sheet to compete, ” it says.

Such a situation is positive for Yinson, given the lesser competition and the chance to command a higher profit margin from the bids submitted. Looking ahead, Yinson expects a better performance in the current FY22, boosted by the full-year contribution from FPSO Abigail-Joseph, which commenced charter on Oct 30, 2020.

Additionally, on June 9, 2021, Yinson announced it has been selected by French oil and gas giant Total to perform preliminary front-end engineering design for two FPSO projects to be installed in Angola and Suriname. The process is likely to lead to a bid, with the contract award expected in 2022.

“Oil companies are currently struggling to find sufficient bidders for large FPSO contracts and we expect this to continue into 2022. More recently, we submitted our bid for the Parque das Baleias project for Petrobras in Brazil, and Upstream reported we are the sole bidder. With this, we believe the outlook is positive for lease FPSO contractors, ” says Yinson.

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