Highlights:
- Yinson Holdings is one of the largest floating, production, storage and offloading vessel (FPSO) operator with a fleet of 6 FPSO and 3 currently in construction. The group recorded a significant 105% growth in revenue with a 56% increase in operating profit from their Engineering, Procurement, Construction, Installation, and Commissioning (EPCIC) business.
- We believe future cash flow from charter contracts to be stable and upon completion of FPSO Maria Quiteria and FPSO Atlanta, recurring revenue and cash flow will likely increase, supporting their ability to service their debts.
- Investors who have a higher risk appetite and looking for higher yielding income can still consider the Yinson Perpetual Non-Call in the first 5 years with an indicative pricing of 7.5% and a A3 rating from RAM, but to be careful of the clauses of perps.
Background of the issuer
Yinson Holdings started its humble beginnings in 1984 as a transport and logistics company in Johor Bahru to become one of Malaysia’s biggest transport companies. In 2011, it expanded into the oil and gas industry through charter contracts for floating, storage and offloading vessel (FSO) and floating, production, storage and offloading vessel (FPSO). Following that, in 2016, Yinson successfully divested its non-oil and gas businesses to focus on serving the offshore oil and gas industry.
Currently, Yinson Holdings Berhad operates as a global energy infrastructure and technology company. With their foray into the renewable energy sector, the group now runs the following business units.
- Yinson Production
- Provision of integrated services for Floating, Production, Storage, Offloading (FPSO) and Floating, Storage and Offloading (FSO) units
- Yinson Renewables
- Global renewable energy power producer focusing on onshore wind and solar.
- Yinson GreenTech
- Green technology solution provider with investments in novel green businesses.
- Farosson
- Advisory, investment and asset management group with a niche in sustainable infrastructure investment.
- Regulus Offshore
- Owns and charters offshore service vessels (OSV) and floating support solutions units.
Outlook
In a report from Rystad Energy, the FPSO industry will remain competitive with a forecast of 48 FPSOs to be awarded as greenfield developments from 2023 to 2030. We believe that Yinson is in a good position to be awarded new FPSO jobs owing to their strong uptime performance and excellent execution track record. Yinson will be able to take on new jobs upon completion of FPSO Atlanta and FPSO Maria Quiteria in mid-2024, however, due to their high debt the projects will have to be bankable with high upfront payment from their clients.
Assuming no new jobs are taken by Yinson, the long-term contracts shown below will provide the required cash flow to service and repay their debts supported by their orderbook over firm and option period of around USD22.4 billion up till 2048. We believe the cash flow from the charter contracts will be quite stable as the clients are well established names with a strong track record in the industry such as Petrobras, Eni SpA, JX Nippon and Azule Energy (Joint venture between BP p.l.c and Eni SpA).
Source: Yinson Holdings Berhad, iFAST compilations. Data as
of 31 December 2023
Financial Performance
Chart 1: Yinson’s Operating Indicators
The group has seen significant
growth in their revenue for 9M FY24 (Feb 23 – Oct 23) marking a 105% increase
YoY from a higher contribution in their Engineering, Procurement, Construction,
Installation, and Commissioning (EPCIC) business activity relating to FPSO
Agogo and FPSO Atlanta and FPSO Maria Quiteria. Furthermore, the commencement
of the charter contract after the completion of FPSO Anna Nerry and it
achieving first oil in May 2023 has contributed positively to the earnings of
the group.
Chart 2: Operating profit of business units
Diving in their segment results, we see that all of their operating profit comes from their FPSO business with the other business units still remains loss making. The EPCIC recorded a higher 70% increase in operating profit on the back of a 137% increase in revenue from RM3.0 billion to RM7.2 billion YoY while the FPSO operations business recorded a 53% increase in operating profit from a 33% increase in revenue YoY, indicating an improvement in operating margins.
We expect to see a slightly weaker performance in the coming quarter as EPCIC contributions from FPSO Maria Quiteria and FPSO Atlanta is expected to be completed in the first half of 2024. However, recurring revenue from FPSO operations is expected to grow from the charter of FPSO Maria Quiteria and FPSO Atlanta this year.
Their renewables segment recorded a higher loss mainly contributed by impairment loss of RM34 million and we expect this business segment to improve in FYE2024 as it commenced operations in November 2023 and is expected to contribute to the segment’s operating profit.
Nevertheless, the green business segment of Yinson is its attempt at diversifying into the renewable energy space as they see it as a growing industry which they expect to achieve profitability in the future as the transition to renewable energy grows.
As such, we expect the other business segments of Yinson to play a small role in the turnover of the company given that it is still in its infancy and has yet to achieve profitability.
Credit Profile
Table 1: Credit Indicators
|
FYE January 31 |
FY20 |
FY21 |
FY22 | FY23 |
9M FY24 |
|
Total debt* (RM'mil) |
5,678 |
7,954 |
10,606 |
11,376 |
16,214 |
|
Net debt* (RM'mil) |
4,402 |
6,133 |
7,747 |
9,869 |
13,370 |
|
Net gearing ratio* (%) |
229% |
282% |
268% |
212% |
216% |
|
Net debt* / EBITDA |
5.72 |
4.97 |
5.53 |
5.54 |
6.74 |
|
Net debt* / Operating cash flow^ |
6.07 |
5.06 |
7.32 |
6.52 |
10.16 |
|
Cash to short term debt (times) |
2.68 |
2.29 |
4.41 |
1.22 |
1.74 |
|
Operating cash flow^ / Interest Expense |
2.25 |
2.64 |
2.01 |
2.11 |
1.76 |
|
*Debt including perpetual debt ^Before working capital changes
Source: Company reports, iFAST Compilations Data as at 15 February 2024 |
|||||
The company is highly leveraged with a net gearing ratio of 216% to finance the high capex requirements for their ongoing construction of 3 new FPSO. Total debt has ballooned to a high of RM14.4 billion from drawdowns of loan facilities to fund the EPCIC business activities related to FPSO Maria Quiteria, FPSO Atlanta and FPSO Agogo. The total debt is expected to increase further to around RM17 billion after securing a USD500 million term loan facility in December 2023.
However, a redeeming note is the non-recourse portion of the debt which minimises the risk of these debts to Yinson’s liquidity. In essence, Yinson’s guarantees are released from the project financing amounting to RM6.7 billion and the lenders are only entitled to repayments from cash flows of the projects that the loans are financing.
With the construction of the 3 new FPSOs being capital intensive, Yinson has had a negative free cash flow. But we see that they have a positive operating cash flow (before changes in working capital) of RM1.3 billion in 9M FY24. It is sufficient to cover interest expense by 1.7 times. Though the interest coverage of 1.7 times is not high, the company is still able to pay the interests by its operating activity, and we expect the coverage ratio to improve once the company grows its future cash flows.
Nevertheless, we believe liquidity to be sufficient to meet obligations in the short-term as seen by their cash to short term debt of 1.74 times which is further supported by their undrawn credit facilities of RM1.8 billion and additional room in their perpetual securities programme of RM1.9 billion.
The current high capex will moderate in the future once the deployment of FPSO Atlanta and FPSO Maria Quiteria completes which will help improve cash flow and bring down leverage levels as debts for the projects are repaid with the additional cash flow from the charter contracts.
The additional burden in interest payments for Yinson in the near future is low with their current floating rates for term loans ranging from 2.73% to 9.45% to likely stay at current levels considering policy rates are likely close to its peak. Owing to that, Yinson will benefit with lower finance cost if interest rates do happen to drop.
Overall, we opine that the credit profile is not decent but the default risk in the short and medium-terms should not be high.
Related Risks
Yinson primarily earns its revenue from EPCIC and charter contracts, with long-term charter and leasing contracts being the recurring revenue for the group. As such, counter-party risk is high for Yinson considering all their contracts relies heavily on the consistent payments from their clients. A downturn in the oil and gas industry could cause their clients to default on their contracted charter payments which will cause cash flow problems for Yinson.
Furthermore, being the owner and operator of the FPSO, maintaining a high operating uptime performance remains imperative for Yinson to avoid loss in income and maintaining a consistent cash flow. An example can be seen with the impairment charge of RM1.6 billion on Bumi Armada Berhad when its FPSO Armada Kraken had to be shut-in following the failure of parts in the FPSO.
Lastly, the refinancing risk for Yinson current debts is high owing to their high leverage and capex. If they are unable to get refinancing, they will be under high liquidity pressures. This could be true in an industry downturn or when the company is unable to generate sufficient cash flow from its operations.
Our recommendation
Despite the cyclical and risky nature of the industry, Yinson should generate a stable and growing cash flow from its operation. But the company might not be able to call the perps in the next call date. Especially when the reset rate in the event of non-call is favourable for the group with a small step-up margin of 1% which does not really incentivise Yinson to redeem the perpetual especially when the group’s operation is capital intensive.
Therefore, investors should expect an uncertain maturity / call date for investing in this perp and focus on the coupon received from the perps rather than principal repayment. We expect the company could pay the perps distribution in the short- to medium- terms, but the uncertainty for its long-term outlook remains high.
Investors who have a higher risk appetite and looking for higher yielding income can still consider the Yinson Perpetual Non-Call in the first 5 years with an indicative pricing of 7.5% and a A3 rating from RAM, but to be careful of the clauses of perps.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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