YINSON’s 1HFY24 results trumped expectations. Its impressive YTD growth (64%) was mainly driven by maiden profit recognition from FPSO Agogo (due to commencement of EPCIC works) and FPSO Anna Nery (following first oil). We raise our FY24F/FY25F earnings by 40%/18%, TP to RM3.79 (from RM3.65) but maintain our OUTPERFORM call.

1HFY24 surpassed expectations. Its core net profit of RM410m came in at 68% and 61% of our full-year forecast and the full-year consensus estimate, respectively. The outperformance versus our forecast was due to higher-than-expected contribution from the EPCIC segment. In particular, the latter was mainly driven by FPSO Atlanta following acquisition of its entire equity interest in end-July via a call option.

YTD driven by FPSOs Atlanta, Agogo and Anna Nery. The more than 2x expansion in YTD revenue was mainly propelled by the EPCIC segment on the back of: (i) FPSO Atlanta: lumpy additional revenue as mentioned above, and (ii) FPSO Agogo: fresh recognition following the commencement of works in 1QFY24. The above, coupled with maiden recognition of charter income from FPSO Anna Nery (first oil: 7 May 2023) enabled core net profit to surge by 64% YTD. To a lesser extent, bottomline was also boosted by extension of charter contracts for associates FPSOs Lam Son and Bien Dong.

The above more than offset drag from: (i) higher effective tax rate of 37% (1HFY23: 31%), (ii) increased finance costs following the drawdown of syndicated loans to fund works at FPSOs Anna Nery (USD670m) and Maria Quiteria (MQ) (USD720m), (iii) higher personnel costs, and (iv) decreased EPCIC profits from FPSO Anna Nery as it reached the final stage of completion.

On the flipside, total YTD LBIT for the renewables and green technologies segments expanded to RM32m (1HFY23: RM12m LBIT) due to higher overheads for gestational operations.

QoQ uplifted by fresh charter income as bottomline expanded 28% was mainly attributed to FPSO Anna Nery’s charter income as indicated above. This more than offset slower EPCIC contribution from FPSOs Agogo and MQ due to slower project progress.

Key takeaways from YINSON’s results briefing include:

1. Management is confident that NOKH’s commission date will finally materialize in October following its connection to the electricity grid. The company maintained its guidance that the plant will contribute quarterly revenue and EBITDA of RM60m and RM12m, respectively.

2. The company is currently in discussions with its auditors to potentially park its renewables business under an investment portfolio. Under this scenario, YINSON will no longer be required to consolidate losses from this segment. The group believes this structure will best reflect the value of these assets, particularly if valuations spike after a successful round of fund raising. Hence, YINSON will be able to recognize the mark-to-market gains from these investments in its books. Furthermore, YINSON believes that these gestational businesses will likely remain loss making in the medium term.

3. Negotiations are ongoing for YINSON’s compensation from Petrobras in relation to FPSO Anna Nery’s stand-by charter income. To recap, this is for the period from 3 Jan up to the day preceding first oil (6 May) at 90% of full-time charter rates. However, approval from Petrobras is expected to be prolonged and stretch beyond FY24.

4. On the other hand, Petrobras has finally approved the payment of FPSO Anna Nery’s mobilization fees. To recap, this amount (c. USD24m) will be recognized over the vessel’s 25-year contract tenure - which translates to USD200k per quarter).

Raised forecasts and maintain OUTPERFORM. We raised our FY24F/FY25F earnings by 40%/18% to reflect higher EPCIC contribution from FPSOs Atlanta and Agogo. Correspondingly, our Sum-of-Parts target price is raised by 4% to RM3.79 (from RM3.65). There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

We continue to like YINSON for: (i) its significant earnings growth from strong FPSO orderbook pipeline with multiple major projects under conversion stage, (ii) its strong project execution track record which positions the company to benefit from strong structural demand for FPSOs, and (iii) it being one of the first local oil & gas company to invest in green technology companies (solar, e-mobility and etc) that may enable the company to achieve its long-term energy transition plans.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) regulatory risks and uncertain returns for renewables investments that are mainly focused in emerging markets (i.e. South America, India), and (iii) project execution risks including cost overrun, delays and downtimes for FPSO assets.

Potential near-term project win. YINSON has circa five outstanding bids for new FPSO projects, which include TotalEnergies’ Maka (Suriname), BP’s Block 31 SE-PAJ (Angola) and Petrobras’ Albacora (Brazil). The strong pipeline is underpinned by the robust market where the group expects 13 FPSO awards over the next 12 months. The majority of the projects comprise large FPSOs with capex exceeding USD1b each. Evidently, 6 FPSO awards have materialized YTD with total estimated capex of USD4.6b. Nevertheless, in the near term, YINSON is most optimistic on its exclusive negotiations with BP for Block 31 SE-PAJ. The contract size is estimated at slightly below USD1b. If all goes well, the project award may materialize by end-CY23. Meanwhile, YINSON expects the Green Tech segment to achieve PATAMI breakeven in three years. This is assuming the entry of new equity investors that will provide additional funding for capex requirements. In turn, this will enable operations to scale up enroute to profitability.

Source: Kenanga Research - 2 Oct 2023