This article first appeared in The Edge Financial Daily on April 3, 2020

Yinson Holdings Bhd
(April 2, RM4.78)
Maintain outperform with a lower target price (TP) of RM6.55 per share: We are negative on Pecan floating production storage and offloading’s (FPSO) letter of intent (LOI) termination as it has a direct devaluation impact on the company. While the project may still be revived, we believe a reconceptualisation is needed given its break-even cost at US$40-50 per barrel. Stress-testing Yinson’s valuations, the yet-to-be-awarded Parque das Baleias project pose the likeliest risk of not materialising, despite Yinson being the sole bidder. Positively, all projects in its order book have relatively low risk of termination, given the iron-clad clauses.

On Tuesday, Yinson received a notice from Aker Energy AS to terminate the LOI issued on Feb 20. The termination is due to the decision made by Aker Energy to postpone development of the project until further notice amid the Covid-19 pandemic.

Naturally, we are negative on the news. We have previously priced in the Pecan project FPSO into our sum-of-parts (SoP) valuation (contributed to RM1.80 per share in our previous SoP valuation), and hence, this termination would directly result in the company’s devaluation. While it is entirely possible for the project to be revived, we believe it would first need to undergo a reconceptualisation with financial breakeven for the project reported to be US$40-50 per barrel.

Among the projects included in our SoP, the Parque das Baleias FPSO project by Petrobras stands out with the highest risk of not materialising, as it is the only one that has yet to be finalised into an official contract. Meanwhile, all the other projects are already included into Yinson’s order book. Secured contracts in the order book should have a relatively low risk of termination, seeing that there are iron-clad termination clauses in place. As for Parque das Baleias, we see that a renegotiation of commercial terms or a delay in project commencement date as highly possible, despite Yinson being the only bidder for the project. Petrobras had recently announced a 29% slash in its annual capital expenditure budget, portraying the oil major’s gradually cautious stance amid the oil price downturn.

We slashed SoP-TP to RM6.55 from RM8.80 previously, as we (i) removed the Pecan FPSO entirely from our valuation, and (ii) reduced our valuation of Parque das Baleias FPSO to RM1.65 per share (from RM2.10 per share), as we increased our applied discounting rate to 8% (from 7%) to reflect the increased risks.  — Kenanga Research, April 2