KUALA LUMPUR: CIMB Equities Research has started coverage of oil and gas services company Yinson with an Add call, and a sum-of-parts (SOP) based target price of RM4.88. 

It said on Monday it valued Yinson’s existing assets at RM4.09, and attach another 79 sen for its potentially-successful bids for two new contracts over the next three to five years.

“Investors in Yinson can take heart in its low-risk business philosophy, high-quality counterparties, excellent project execution to date, and tight family-run operations.

“We think Yinson deserves to trade above the value of its current portfolio. Hence, our SOP-based TP of RM4.88. Future contract wins could potentially raise its share price,” it said.

Yinson is a pure-play floating storage and offloading (FSO) and floating production, storage and offloading (FPSO) company, with a very minor presence in the offshore service vessel (OSV) segment.

CIMB Research said Yinson may bid for two projects that may be awarded in the next 12-18 months, i.e. Hess Ghana’s TCTP development, which requires a US$1bil capex FPSO, and Vietnam’s Block B, which requires a FSO solution. 

Beyond these, Yinson is on the prowl for more projects. It has a US$500mil perpetual securities programme, which can fund up to US$2bil in capex, and a net gearing ratio of only 0.88 times at end-FY18F (our estimates). 

Yinson also has one asset readily available for redeployment opportunities. 

CIMB Research said in its view, Yinson is unlikely to face issues from contract termination because its counterparties are of good quality. 

Three of its assets are chartered to the subsidiaries of national oil companies in Vietnam and China, one asset chartered to a global oil major, and two more assets to financially-healthy independent oil companies. 

One of Yinson’s FPSOs was recently prematurely terminated, while another was flagged for possible termination. 

The charterers in both cases promise to pay full contractual compensation. 

Yinson deliberately invested only 51% in a JV that purchased a secondhand, idle FPSO in order to spread the risk, while searching for redeployment opportunities. 

Yinson edged out tough rivals to buy the secondhand OSX-1 FPSO from a consortium of European banks, but cleverly tied them into continued funding for the FPSO CRD project.

Yinson is also due to conclude the sale of a 26% stake in FPSO JAK, profiting handsomely from it.   

Choosing its battles wisely Yinson focuses on bids for FPSO contracts in Southeast Asia and West Africa, where it is most comfortable and where it has previous operating experience. 

Yinson is less interested to bid for Indian contracts due to red-tape issues, and also not keen on Brazil due to local content requirements. 

Yinson is not interested in North Sea FPSOs due to technical and regulatory complexities. 

We forecast earnings to step up in FY18F with FPSO JAK, then sustain in FY19-20F as FPSO CRD offsets rate reductions elsewhere.