Yinson Holdings Bhd
(May 18, RM3.11) 
Upgrade to buy with a higher target price of RM3.60 from RM2.85: We upgrade Yinson to a “buy” with a higher fair value of RM3.60 per share (from RM2.85 per share), based on our sum-of-parts (SOP) valuation. 

Our fair value implies a financial year 2016 ending January forecast (FY16F) price- earnings ratio (PER) of 25 times, a premium to the oil and gas industry average of 17 times. We deem this justifiable due to the strong counterparties for its floating, production, storage and offloading vessels (FPSO) and the potential for earnings to double upon the commencement of the Offshore Cape Three Points block (OCTP) FPSO in Ghana.

Following a recent meeting with management, we raise our valuation of OCTP as we have imputed a higher internal rate of return of 12.5% as guided by management, compared with our previous assumption of 10%. The OCTP project currently accounts for 48% of our total SOP valuation.

Upon the commencement of operations in September 2017, the FPSO is expected to contribute to the bottom line significantly, with approximately RM150 million full-year accretion.

We have accounted for four months contribution from the project for FY18F. Earnings for FY19F should double FY15F’s, although this is not currently within our forecast horizon.

We are taking a more constructive stance on the OCTP contract. We understand the execution and counterparty risks appear somewhat low given that its customer, Eni SpA, is one of the largest integrated energy companies in the world with a market capitalisation of €61 billion (RM247 million) and a healthy balance sheet (net gearing of 0.3 times). Furthermore, Yinson does not bear the risk of lower crude oil prices potentially causing the production from the FPSO to be economically unfeasible. This is because Yinson is well protected by the contract terms between the two parties. The early termination fees would preserve its net present value currently derived from the project.

With 75:25 debt-to-equity funding for the project, the group’s net gearing is expected to increase from 0.32 times currently to more than two times over the next two to three years. This would be progressively offset by the strong earnings and cash flow generated from the FPSOs.

Yinson’s plan to divest its non-oil and gas operations (valued at RM273 million) by this year will further help pare down its gearing levels.

Meanwhile, we understand that Yinson is actively bidding for more FPSO contracts. 

One such contract is the Ca Rong Do project in Vietnam by Talisman Energy Inc (now Repsol SA), according to international oil and gas newspaper Upstream. 

The FPSO will have a production capacity of between 25,000 barrels per day (bpd) of oil and 30,000 bpd, plus 60 million standard cu ft per day of gas, with first production targeted in the second quarter of calendar year 2018.

The stock currently trades at a FY16F PER of 21 times. The entry of Kencana Capital Sdn Bhd as the second largest shareholder should continue to underpin the sentiment of the stock, given its excellent track record in growing Kencana Petroleum (subsequently SapuraKencana Petroleum Bhd) into one of the largest oil and gas service providers in the country. — AmResearch Sdn Bhd, May 18.

This article first appeared in The Edge Financial Daily, on May 19, 2015.