YINSON's 9MFY24 results met expectations. Its profits surged YoY driven by FPSO Anna Nery. It is prioritising project execution at present. We rationalise our FY24-25F earnings forecasts by excluding EPCIC profits. We maintain our underlying FY24F number but cut our underlying FY25F number by 15%. We reduce our TP by 10% to RM3.39 (from RM3.79) but maintain our OUTPERFORM call.

9MFY24 profit within expectations. The core net profit of RM275m (adjusted for RM34m impairment on assets, RM112m deferred tax expense, and RM552m EPCIC profit) was within our expectation at 69%. Notably, our non-EPCIC profit forecast for FY25F was at RM400m. We avoid comparing to consensus profit due to its diverse mix of forecasts, with some projecting EPCIC profits while others do not. We anticipate 4QFY24 earnings to remain comparable to 3QFY24, supported by FPSO Anna Nery contribution.

Lifted by FPSO Anna Nery. The substantial 105% YoY surge in 9MFY24 revenue was primarily due to FPSO Anna Nery's oil production commencement in May 2023 and increased EPCIC revenue from the conversion of FPSO Agogo. However, core profit, excluding the impact of EPCIC profit, witnessed a comparatively slower growth rate of 82%.

This deceleration can be attributed to: (i) elevated finance costs resulting from increased loan drawdowns for upcoming projects, (ii) amplified losses in other segments due to higher overhead costs associated with project start-up expenses for incoming FPSO projects, and (iii) heightened losses from the Yinson renewables division due to project start-ups that were later than planned.

QoQ weakness was due to higher costs. In 3QFY24, a 10% QoQ decline in topline was attributed to reduced work recognition in FPSO conversion. Excluding the EPCIC impact, revenue saw an increase, primarily attributable to the contribution from FPSO Anna Nery. Nevertheless, the core profit experienced a 10% QoQ dip, caused by higher finance and administrative costs, stemming from heightened holding company overheads.

Key takeaways from YINSON’s results briefing include:

1. YINSON currently prioritizes the execution of its upcoming FPSO charters namely FPSO Maria Quiteria, FPSO Atlanta and FPSO Agogo over actively bidding for additional major FPSO projects in the near term.

2. The RM34m impairment pertains to the Nokh solar power plant in India, attributed to a startup delay. The project commenced operations on November 3, 2023, and is anticipated to contribute RM10m EBITDA per quarter.

3. No delays are anticipated for the FPSO projects under conversion. FPSO Atlanta and FPSO Maria Quiteria are expected to achieve first oil in 2QFY25.

Forecasts. We revise FY24F and FY25F earnings downward by 53% and 35%, respectively, after treating EPCIC profits as non-core earnings. Excluding EPCIC, our FY24F net profit assumption is largely maintained, but we cut our FY25F earnings by 15% due to assumed higher overhead costs driven by the ramp up in FPSO project costs.

Valuations. Correspondingly, we reduce our SoP-TP by 10% to RM3.39 from RM3.79. Note that our TP reflect a 5% premium given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We continue to favour YINSON due to: (i) a strong FPSO order book pipeline with multiple major FPSO jobs under the conversion stage which provides significant earnings growth in coming years, (ii) its strong project execution track record which positions the company to benefit from strong structural demand for FPSO contractors anticipated in the coming years, and (iii) it being one of the first local oil & gas company invest in green technology companies (solar, e-mobility, etc) which in our view would help with the company’s long-term energy transition agenda. Maintain OUTPERFORM.

Risks to our call include: (i) crude oil prices falling below hurdle rates for floating production projects, (ii) regulatory risks and uncertain returns for RE 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.

Source: Kenanga Research - 15 Dec 2023