This article first appeared in The Edge Financial Daily on April 3, 2019

Yinson Holdings Bhd
(April 2, RM4.59)
Maintain buy with a target price of RM5.54: Yinson Holdings Bhd has proposed to take over Ezion’s existing debt (amounting to US$916 million [RM3.74 billion]), whereby the total amount would be convertible into equity. Cash outlay is estimated at US$200 million, but our calculations indicate that on an all-in basis, the deal would be book value accretive. We are slightly positive about the proposed exercise given its long-term value unlocking potential, coupled with possible turnaround in earnings.

Through paying for an enterprise value of about US$800 million, Yinson would be able to gain control of Ezion’s suite of assets including: i) 12 lift boats; ii) 17 jack-up rigs (13 drilling rigs, three accommodation rigs, and one mobile offshore production unit); and iii) 35 vessels (nine tugboats, two landing craft, 19 barges, and five offshore support vessels).

Based on Eversendai Corp Bhd’s last contract for construction of two lift boats worth RM580 million back in 2014, each was valued at about US$72.5 million. Assuming USS60 million per unit due to the weaker market outlook, total lift boat assets on Ezion’s book would be worth US$720 million, valuing the rest of the assets at only about US$80 million. Therefore, we believe the purchase price looks attractive for Yinson, given the gradual improvement in the upstream sector outlook.

Upon successful conversion of debt into ordinary shares, the deal would actually be book value accretive to Yinson, with net addition of US$539 million to its total equity value (after Ezion recapitalisation). This assumes it uses the US$150 million debt financing for the cash outlay. That aside, the group targets to achieve US$120 million earnings before interest, taxes, depreciation and amortisation in 18 months after the acquisition. This assumes that lift boat utilisation is ramped up to 92%, with other asset utilisation assumed to be similar to 2018, which could lead to recurring profit base of US$30 million per annum. This could provide a 31% boost to our financial year 2021 forecast earnings, assuming that Yinson owns 70% of Ezion after deal completion. Assuming 10 times price-earnings ratio, it could add another 36 sen per share to the group’s fair value on a net debt basis. — RHB Research Institute, April 2