Yinson Holdings Bhd
(June 18, RM4.62)
Maintain outperform with a higher target price (TP) of RM5.30: Last Thursday, Yinson Holdings Bhd entered into an exclusive negotiation with First Exploration & Petroleum Development Company Ltd (First E&P) to discuss the supply of a floating production storage and offloading (FPSO) unit along with operations and maintenance (O&M) works for the Anyala & Madu field (under oil mining leases 83 & 85) located 40km offshore of Nigeria. Tentatively, the contract is to have a firm period of seven years with an option to renew for up to eight years. The oil field is jointly owned by First E&P (40%) and Nigerian National Petroleum Corp (60%).
The planned FPSO for Anyala & Madu will be developed based on an existing FPSO to exploit the field containing around 340 million barrels of oil equivalent. With an estimated capital expenditure (capex) of US$400 million, the Anyala & Madu FPSO is intended to produce 50,000 barrels of oil and 120MMscf of gas per day. We are confident that Yinson would be able to seal the deal given its robust track record within the FPSO space. If successful, this would be its second FPSO in Nigeria (after FPSO Adoon secured back in 2006).
Overall, we are positive on the contract as it could potentially boost Yinson’s current outstanding order book of around US$3.2 billion by around US$1.2 billion (+38%; US$800 million firm, US$400 million option) and also inject another stream of recurring net income worth around RM100 million per annum (37% of financial year 2020 estimate [FY20E] earnings) based on earnings before interest and tax margin of 35%. For now, we make no changes to FY19E and FY20E earnings as contributions from the new FPSO will only kick in from FY21 considering time required for vessel acquisition and modification.
The demand for FPSOs is picking up as oil majors gradually revive projects shelved during the industry downturn, underpinned by the stronger and more stable oil prices. Given that the capex size of US$400 million for the Anyala & Madu FPSO is relatively small compared with Yinson’s earlier indicated capex target of US$1 billion, we believe Yinson is still on the lookout for more projects in Mexico, Ghana and Brazil, in which three tenders (of which two are worth around US$1 billion) will potentially be announced by year end.
We maintain our “outperform” call with a higher sum-of-parts-(SoP)-derived TP of RM5.30 (from RM4.50) after imputing 60 sen per share for the Anyala & Madu FPSO, assuming: i) US$400 million capex, ii) 15% internal rate of return (IRR), and iii) seven-year firm, and also accounting for an expected O&M contract win (Layang FPSO worth 20 sen per share). Note that we have an additional expected FPSO contract win in FY20 amounting to 49 sen per share in our SoP as we foresee Yinson securing another FPSO contract given the healthy FPSO market, underpinned by stronger crude prices, and Yinson’s capacity to bid further on the back of a stronger financial footing post disposal of 26% in JAK FPSO, which was completed on June 6, 2018.
Our new contract in FY20 assumes: a) 14% IRR, b) eight-year firm period, c) 50% equity stake, and d) US$1 billion capex. Our TP implies FY19E and FY20E price-earnings ratio of 19.5 and 21.3 times, which we deem fair given Yinson’s ability to generate recurring cash flow, and secure contracts with oil majors amid the competitive global FPSO market.
Risks to our call include project execution risk, and weaker-than-expected margins. — Kenanga Research, June 18