YINSON HOLDINGS BHD appears to be strengthening its balance sheet to gear up for future growth. Last week, the group announced a divestment plan to hive off its logistics and trading business, and a share placement exercise to raise fresh capital.

Executive chairman Lim Han Weng tells The Edge that proceeds from the sale of non-core assets will enable Yinson to concentrate on oil and gas projects with higher internal rate of return (IRR).

“The divestment will enable the group to achieve a firmer valuation among its oil and gas peers. Subsequently, the additional capital will improve the group’s headroom for growth,” says Lim.

According to The Edge Research, Yinson (fundamental: 1.50; valuation: 1.50) is currently trading at a price-earnings ratio of 13.87 times with a rolling 12-month return on equity of 25.17%.

Last week, Yinson announced that it was exiting its logistics and trading business to focus on its floating production storage and offloading (FPSO) business by divesting the non-core assets to Liannex Labuan Ltd for RM228 million.

Liannex Labuan is wholly owned by Liannex Corp (S) Pte Ltd, which is wholly owned by Lim and his wife Bah Kim Lian.

“After this divestment of non-oil and gas assets, the group will be a full-fledged oil and gas player in the FPSO market. Other assets that the group possesses are offshore support vessels, which it does not plan to divest,” says Lim, who has a 22% stake in Yinson.

The group also intends to raise about RM300 million through a private placement that is based on the issuance of up to 103.3 million placement shares, representing up to 10% of its total share base with an indicative price of RM2.90 apiece.

Lim says the proceeds are earmarked for repayment of borrowings, which amounted to RM844.1 million as at April 30.

He adds that while Yinson’s net gearing is currently at 0.35 times, it could afford to expand the level to 2.5 times.

“Growth will not be compromised as the group still has a healthy cash balance of RM326.5 million,” Lim says, adding that the group has sufficient cash flow for its current projects as all financing has been secured and are in place.

Yinson had earlier this year signed a US$780 million term loan facility to part-finance the conversion and refurbishment of its FPSO that is contracted to ENI Ghana at the Offshore Cape Three Points (OCTP) Block located in the Tano Basin, off the coast of Ghana.

The 15-year contract has a five-year extension option that would bring the contract value to US$3.26 billion, which is the biggest contract by value Yinson has been able to secure.

Lim says Yinson has always been very prudent in securing projects, ensuring that depreciation of assets are usually write-down based on the fixed contract tenures, unlike others, which take into account the option periods.

“When evaluating new projects, we look into a number of criteria such as good margins, higher IRR, short return on investment period and long-term tenures. One of Yinson’s strategies is securing projects prior to securing assets for them. This way, the group’s financial risks are mitigated,” he adds.

Meanwhile, Yinson’s net profit for the first quarter ended April 30, 2015 (1QFY2015) fell 65.51% to RM10.4 million from RM30.3 million the year before due to foreign exchange losses. Its core net profit, however, was up 11.5% to RM40.4 million from RM36.42 million previously.

Revenue dropped 12.74% to RM256.59 million from RM294.07 million previously.

According to Maybank IB Research analyst Liaw Thong Jung, Yinson is a growth stock with resilient earnings. “The jump in profits will be significant come FY2018, after its FPSO OCTP job has commenced in September 2017,” he said in a note.

“We do not rule out the potential distribution of part of the proceeds from the divestment to shareholders in the form of special dividends,” adds Liaw.

Maybank has a “buy” call on the group with a target price of RM4.35, the highest from the five local research houses that cover the group.

Out of the other four research houses, there are two “buy” calls, one “outperform” and a “hold”. The last is by UOB Kay Hian, which has a target price of RM3.60 on Yinson.

UOB Kay Hian says in a report that Yinson’s US$4 billion order book, which has a long tenure, bodes well for the group on its long-term cash flow visibility.

“We believe further upside will depend on Yinson’s project delivery. The discounted cash flow discount could be removed in the long run, closer to its first oil (in 2017). Near-term earnings growth is likely to be flattish,” it says.

Yinson’s share price soared to an all-time high of RM3.47 in September last year before tumbling 30% to RM2.43 following the drop in crude oil prices. The stock closed at RM3.06 last Friday with a market capitalisation of RM3.15 billion.

This article first appeared in The Edge Malaysia Weekly, on July 6 - 12, 2015.

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