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This article first appeared in The Edge Financial Daily on January 11, 2019

Yinson Holdings Bhd
(Jan 10, RM4.20)
Maintain buy with a lower target price (TP) of RM5:
While the execution of floating production storage and offloading unit (FPSO) Helang remains smooth, Yinson Holdings Bhd’s financial year 2010 (FY20) earnings may face headwinds due to the Allan termination and potential start-up delays of Anyala/Madu due to ongoing negotiations with client First E&P. Hence, we cut FY19 to FY21 forecasts by 0% to 14%. Nevertheless, current levels have priced in these risks, with major upside from potential contract wins as the group is a strong contender for project bids in Brazil (first half of 2019 [1H19]), Africa and Vietnam (2H19). We maintain our “buy” call with a new TP of RM5.

 

The conversion and change of name of FPSO Four Rainbow to FPSO Helang has reached more than 50% progress in a China yard (Phase 1), and this met management’s guidance. This covers many large and important modules like the turret, E-house and topsides. In December 2018, the FPSO was reported by Upstream to have arrived at Cosco’s Qidong facility for the next phase of upgrades. According to the article, this phase will take about eight months to complete. Based on this, we think Yinson will be able to deliver FPSO Helang on time (by September to October 2019) to meet the client’s first gas target. We retain our forecast for one quarter’s contribution from Helang in the fourth quarter of FY20 (4QFY20).

FPSO Anyala/Madu may encounter start-up delays. The US$1 billion (RM4.1 billion) Nigerian contract is still under exclusive negotiations with the client (First E&P), whereby the finalisation of the terms had been delayed several times to Dec 27, 2018 (or a mutually agreed later date). Recap that Yinson has identified an available FPSO with options ready for purchase, once all final deliverables are concluded. Despite this, the project has already begun the engineering phase. We believe Yinson is still in negotiations with First E&P to finalise the contract, including ensuring contract terms to provide adequate protection from termination events. Although maiden earnings contribution may be delayed from the first oil target of third quarter of 2019 (3Q19), we believe termination risk is low and it is unlikely that the client may look for an alternative contractor and the field economics is still viable at current oil prices.

It was nearly a year ago (in March 2018) when Repsol invoked force majeure on the FPSO Ca Rong Do project on the disputed waters issue between China and Vietnam. The suspension is still ongoing. A termination compensation may be a potential event by 2H19 as it is not beneficial for both Yinson and Repsol to keep this project in a suspension mode. Nevertheless, we believe that the amount is minor assuming that it covers the initial project costs, given that Yinson did not purchase a FPSO nor incur any major running costs for the project. — UOB Kay Hian, Jan 10

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