Yinson Holdings Bhd
(Oct 21, RM2.63)
Upgrade to neutral with target price of RM2.60: Yinson recently received a one-year extension of the contract for its 100%-owned floating production, storage and offloading (FPSO) vessel, Knock Adoon, which is chartered by Addax Petroleum Development in the Antan Field (Nigeria). The extension contract is valued at US$39 million (RM127.14 million) until Oct 16, 2015.

Given the value, the bareboat daily charter rate (DCR) translates to around US$100,000, slightly higher than Norwegian Fred Olsen Production’s last reported DCR of US$80,600.  Nevertheless it is within our expectations. We retain our forecasts for financial year 2015 (FY15) and FY16, which include the extension contract and its value from this FPSO’s contribution.

The FPSO has served for an eight-year firm period (from October 2006) and is expected to have a 8x1 optional renewal. While the extension is welcome news, we are neutral on its impact as the risk of the client not exercising the remaining seven extensions may affect Yinson’s earnings beyond FY16.  It may also reduce our sum-of-parts (SOP) numbers, which had fully valued the extension contracts. This risk depends on several factors, for example the field’s production profile and the FPSO’s operational track record.

Our target price (reflecting a 21 times FY16 price-earnings ratio (PER) and 12 times FY16 enterprise value/earnings before interest, taxes, depreciation, and amortisation) is based on SOP and discounted cash flow valuations of its FPSOs, which are valued through both firm and optional periods.

We take the opportunity to upgrade Yinson to “neutral” from “sell”, given that its share price has fallen by 23% in the past month and the counter is now fairly valued. We believe the speculative elements were removed from the share price in the recent decline in market sentiment. However, investors still expect Yinson to secure at least one additional new FPSO project as soon as in the next few quarters.

We remind investors that earnings from new FPSO projects would only be material two years after the contract is awarded. As such, we do not expect FY16F and FY17F profit growth to be exciting. — RHB Research, Oct 21

This article first appeared in The Edge Financial Daily, on October 23, 2014.