Yinson has entered into yet another consortium agreement
with PTSC to manage a charter contract for an FPSO project from the Lam Son Joint
Operating Company (LSJOC). The contract is worth US$737.3m (~RM2.35b) with a
duration of 10 years. (7 + 3 years). We
already have high hopes for the company given its 1) steady YoY net profit growth
and 2) its close relationship with Petrovietnam, which makes it a proxy to the
opportunities in Vietnam’s Oil & Gas market. The successful completion of
the project will take the company to new heights. After the inclusion of the
new project and some fine-tuning to our WACC and balance sheet assumptions for the existing businesses, we
have raised our Sum-of-Parts (SOP) base target price to RM2.68 (from
RM2.25.share) based on FY14 numbers.
Staying conservative
on delivery date. First oil for the project was initially expected by
Oct-2013 but given the delay, we believe the JV could be given a grace period
till end-1HCY14. In view of the
potential timeline risks for the project, we have gone a step further and
conservatively factored in only a 8-month contribution in FY15E (i.e. start-up
by June 2014).
FPSO earnings to grow
along the years. We anticipate the
project will bump Yinson’s FY15-16 earnings by
RM16.5m and RM27.2m respectively. Consequently, we expect earnings to
continue growing as interest costs are subsequently paid off. Based on 1) WACC discount assumption of 8.9%; 2) 70:30 debt to equity ratio and 3) interest
costs of 5%, we estimate that the project could add 94 sen/share to Yinson’s
sum of parts valuation. Our WACC discount rate is significantly higher than
that of Yinson’s previous FSO project at 4.8%) to account for the 1) enhanced
complications for a FPSO project and 2) the tight deadline that the consortium
has to try to adhere to (less than 18/24 months project).
Corporate exercise
for equity portion within FY13. We
do not rule out the possibility that Yinson will raise fund for its equity portion of the contract.
In the interim, it is believed that it will rely on short-term borrowings but
aiming to kick off a fund-raising corporate exercise within FY13. Assuming a drawdown
of c.RM76m for the project in FY13, interest costs will rise by RM4.6m and net
profit will be reduced to RM27.7m (from RM31.4m). We have accounted for such
costs in our FY13, which reduces our net profit by 12.2% to RM27.6m. In regard
to any other corporate exercises, there is potential dilution from additional
equity but the net impact will very much depend on the ultimate instruments and
financing structure. We highlight this as something for investors to look out
for.
Fine-tuning FSO
assumptions. We have 1) assumed some
additional administrative costs; 2) increased our interest cost assumptions to 5% (from 4%
previously (which bumps up our WACC assumptions to 5.29% (from 4.8%); and 3)
increased our foreign exchange rates to RM3.15 (from RM2.90). This resulted in
our FY14-15E JV contribution falling to RM13.8m and RM23.6m (from RM15.2m and
RM25.1m) respectively. Overall our FY13-14E net profit estimates have been
reduced by 12.2% and 2.4% respectively.
However, our FY15E net profit has increased by 21.1% largely from the FPSO
contributions.
Maintain OUTPERFORM.
Our new target price is RM2.68 (from RM2.25), which boasts
a total return
of 27% (inclusive
of dividend yield
of 0.8%). We maintain our OUTPERFORM call on the stock.
We highlight that while there are significant risks for the company taking on
such a large contract, a successful completion will nonetheless boost Yinson’s
experience, skill-sets and track records.
Source: Kenanga
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