Yinson Holdings Bhd 
(March 13, RM2.90)
Maintain outperform with a higher target price (TP) of RM3.81 from RM3.34: Last Thursday, Yinson Holdings announced that it had secured debt financing (a US$780 million [RM2.89 billion] term-loan facility) for its recently awarded Ghana floating production, storage and offloading (FPSO) project. 

This is positive as it showcases Yinson’s ability to generate cash flow for loan repayment even amid the oil and gas industry downturn. 

We believe that the drawdown for the loan facility will be in conjunction with the timing of capital expenditure (capex) for the project, expected to be over the next three years. 

To recap, Yinson has been awarded a contract by Eni SpA with firm contract value worth US$2.5 billion.

The FPSO facility will be stationed at the Sankofa-Gye Nyame field located in the Tano Basin, about 60km off the coast of Ghana. This is a deep-water oilfield with 500 million barrels of exploitable oil and 1.45 tonnes per cu ft of non-associated gas in place.

Eni SpA has secured a gas sale agreement with the Ghana government to supply non-associated  gas from the Sankofa field to the country’s thermal power system from 2018 to 2036. 

Yinson is also believed to be pursuing the job which requires an offshore unit to support the gas production. This, we believe, could further lift Yinson’s long-term earnings and discounted cash flow (DCF) in the event of it winning the job.

However, discussions are still at a preliminary stage at the moment, but we gather that the capex for the project could amount to US$200 million, which is smaller in size relative to the FPSO project it secured last month.

The company has made clear its strategy to focus on execution of the initial FPSO conversion phase of the FPSO Ghana project in the coming two years to maintain its service quality for its client. 

Aside from the potential non-associated gas project in the Sankofa field, the group intends to secure another mid-size FPSO project by end-2016. We opine that the capex of the potential FPSO project could be in the region of US$700 million to US$800 million in comparison with the US$950 million to US$1 billion expected capex for the Ghana job. 

Should it secure the next FPSO job, we believe a private placement in the second half of 2016  is potentially likely to fund the potential 30% (assuming 30:70 debt-to-equity ratio) equity portion of the project’s capex which amounts to between US$210 million and US$240 million.

Previously, we were too conservative in our DCF valuation of the Ghana FPSO project which excluded the operating expenditure revenue portion (between US$30 million and US$40 million per annum) and US$106 million cash advance this year. 

After including the two items, our Ghana DCF valuation has increased from RM929 million to RM1.242 billion. Our DCF valuation is based on 11% initial rate of return with an earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 75%, in line with other FPSO projects with Ebitda margins (75% to 85%). 

Post-adjustment, our sum-of-parts (SoP)-derived TP has increased to RM3.81 (an increase of 20.1%) from RM3.34 previously with other segmental valuations maintained. 

If the Ebitda margin of 80% is achieved due to better cost management, our TP will be lifted to RM4.06.

We maintain our “outperform” call on the stock post our upward revision in SoP-derived TP.

We continue to like the stock for its defensive FPSO business model with firm contract tenures spanning five to 15 years, strong negotiation ability which is critical for getting favourable contractual terms for FPSO jobs, and relationship with Italian oil major, Eni SpA, which Yinson could capitalise on in the long term for future upcoming projects. 

In addition, we are also comforted by the fact that there are clauses in the FPSO contract which safeguards the contract’s net present value in the event of a force majeure, eliminating contract termination risk.

Risks are execution risk for FPSO jobs on hand, extensions on existing contracts not exercised, and natural disasters which may impair the operations of the FPSO. — Kenanga Investment Bank Bhd, March 13

This article first appeared in The Edge Financial Daily, on March 16, 2015.