Yinson’s stock surges on acquisition of Fred Olsen, shares placement to Kencana Capital

by **Cals** Sat 15 Jun 2013, 15:25

Saturday June 15, 2013
Yinson’s stock surges on acquisition of Fred Olsen, shares placement to Kencana Capital
By JOHN LOH
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[You must be registered and logged in to see this image.]Chern Yuan: Yinson expects to accrue immediate benefits from the transaction

THE week of June 3 was doubtless a hectic one for [url=http://archives.thestar.com.my/search/?q=Yinson Holdings Bhd]Yinson Holdings Bhd[/url]. In Norway, company officials were busy sealing the deal to buy Fred Olsen Production ASA (FOP) from the prolific Olsen family.
Back in Malaysia, Yinson's stock was experiencing a surge like no other. It leapt from below RM3 to nearly RM5 as executives from Yinson and FOP shook hands in the Scandinavian Peninsula.
But that alone was not reason enough. The week prior, Yinson, whose mainstay is in marine and logistics services, revealed it had signed on [url=http://archives.thestar.com.my/search/?q=Kencana Capital Sdn Bhd]Kencana Capital Sdn Bhd[/url], a vehicle owned by [url=http://archives.thestar.com.my/search/?q=Datuk Mokhzani Mahathir]Datuk Mokhzani Mahathir[/url] of [url=http://archives.thestar.com.my/search/?q=SapuraKencana Petroleum Bhd]SapuraKencana Petroleum Bhd[/url], as a substantial shareholder via a placement of new shares.
The announcement barely made a crackle upon its release on Friday, but sure enough, by Monday everyone took notice.
The timing of both Kencana Capital's entry and the FOP acquisition, industry observers point out, was no coincidence. Market talk has it that Yinson is set to get a foot in the door for local oil and gas jobs by dint of Mokhzani's connections and savvy.
At least one industry source thinks this is a foregone conclusion. “With Kencana Capital in the picture, the question is not if but rather when,” he shares.
StarBizWeek reported several weeks ago that Yinson was eyeing the purchase of a handful of floating production, storage and offloading vessels (FPSO) whose values had been heavily written down.
This turned out to be the case when, on Monday, Yinson took the lid off its general offer for Oslo-listed FOP's shares. If successful, the takeover would augment Yinson's number of FPSOs to four from just one, leapfrogging it to No. 6 in the world by FPSO fleet size. The firm also partly owns a floating storage and offloading unit (FSO).
FPSOs are essentially floating oil production facilities. An FPSO is used to receive and process raw oil from a nearby drilling platform. The oil is stored in the vessel and then offloaded onto a tanker or through a pipeline. Notably, [url=http://archives.thestar.com.my/search/?q=Bumi Armada Bhd]Bumi Armada Bhd[/url], owned by [url=http://archives.thestar.com.my/search/?q=T. Ananda Krishnan]tycoon T. Ananda Krishnan[/url], is ahead of Yinson in fifth place with five FPSOs.
Friendly takeover
The buyout of FOP involves an offer for its shares at 9.40 crown (RM5.20) apiece, or an aggregate sum of RM576mil. FOP has three FPSOs, all which are currently working for international oil firms in Nigeria and Gabon. One of the vessels is jointly-held with fellow Norwegian FPSO firm BW Offshore.
FOP also operates a mobile offshore production unit that services an oilfield in Antan, Nigeria, alongside one of its FPSOs.
Yinson already has the support of FOP's parent, [url=http://archives.thestar.com.my/search/?q=First Olsen Ltd]First Olsen Ltd[/url], which owns 61.54% of FOP, through an irrevocable and unconditional pre-acceptance of the takeover offer, meaning the deal is largely in the bag.
The exercise, to be completed by end-August, would be paid for using the RM162mil raised from two recent share placements, including the one to Kencana Capital, RM400mil in bank borrowings and RM14mil in internal funds. This would swell its gearing to a hefty 2.5 times and debt to RM1.28bil.
But because FOP's assets are in operation, Yinson expects to accrue immediate benefits from the transaction, its [url=http://archives.thestar.com.my/search/?q=Lim Chern Yuan]executive director Lim Chern Yuan[/url] tells StarBizWeek in an interview.
The company's FPSO and FSO order book, for starters, balloons to about US$2.35bil (RM7.33bil) post-acquisition. This is on top of the US$200mil (RM624mil) jobs-in-hand it has in its offshore supply vessel arm.
Chern Yuan, 29, is the son of chairman and [url=http://archives.thestar.com.my/search/?q=Lim Han Weng]managing director Lim Han Weng[/url], who founded Yinson as a transportion company in Johor Bahru.
Industry insiders say the takeover does not come as a total surprise. Since the global financial crisis of 2008, Norwegian FPSO operators, in particular, have been consolidating. Of Norway's 11 FPSO firms, five have folded, three were bought over and the rest have not received new jobs for years.
Yinson's Lam Son FPSO was, in fact, inherited from FOP, which was how talks began between the two. The Vietnam-bound vessel, currently under conversion at Singapore's Keppel shipyard, was to be operated by FOP but was passed over to Yinson after the former's shareholders decided to pull out of the business, Chern Yuan says.
“It was a friendly handover,” he quips. “The negotiations ended on good terms. From then on the major shareholders decided FOP would be in better hands with Yinson.”
Opportunities aplenty
Last year, only five FPSO lease contracts were awarded from an anticipated 20 orders because of economic uncertainty and geopolitical tensions. However, if the punters have their way, things are looking up.
According to a Maybank IB Research report in April, the global FPSO arena is “replete with opportunities”. The count for FPSO projects in planning has risen to 154 from 86 in 2008, and while five jobs had been awarded in the first quarter of this year, a further 16 to 26 are expected to round off 2013, mostly in Asia, Africa and the Americas.
With FOP, Chern Yuan sees his mostly family-owned company moving up the value chain. “Yinson used to only do bareboat charters, but now we have the ability to handle time charters and project management,” he says. “There will be less joint ventures now. We can take on projects 100%.”
Even though the tenure for its FPSO Knock Adoon in Nigeria expires in October next year, the earliest of all its vessels, Chern Yuan says he is confident of the client agreeing to an eight-year extension option, given that production is still at a respectable 50,000 barrels per day. FOP's firm and option periods run till 2022-2029.
“FPSOs are best suited for marginal fields or fields without pipelines,” he adds. “We bought FOP on the premise that more marginal field tenders are coming onstream. And with oil prices at these levels, it makes sense for oil companies to start production soon. The lead time for FPSO delivery is typically between 20 and 24 months.”
Once FOP is part of the family, more than 90% of Yinson's earnings would be O&G-based. Its blended margins are also projected to improve considering FOP enjoys EBITDA (earnings before interest, taxes, depreciation and amortisation) margins in the 50% range, Chern Yuan says.
Industry sources in favour of the marriage believe Yinson is set to emerge as one of the only two genuine FPSO plays in the local market, next to incumbent Bumi Armada. An industry official remarks that [url=http://archives.thestar.com.my/search/?q=TH Heavy Engineering Bhd]TH Heavy Engineering Bhd[/url], despite it having a vessel ready for conversion, is less of a contender because floating solutions are not the fabricator's core business.
As for [url=http://archives.thestar.com.my/search/?q=Perisai Petroleum Teknologi Bhd]Perisai Petroleum Teknologi Bhd[/url], Maybank IB Research thinks the firm is unlikely to embark on another FPSO venture within the next 12 months as it needs to first deploy its first FPSO in the Kamelia gas field.
Meanwhile, Chern Yuan maintains that the investment by Kencana Capital is unrelated to SapuraKencana. The Lim family would retain a 43% stake in Yinson and Kencana Capital 18.5% following the new share issuances, making them the company's first and second-largest shareholders.
“Mokhzani has been in O&G for a long time now and he likes the industry,” Chern Yuan says. “There is no conflict of interest between SapuraKencana and Yinson. We are in one part of the business that SapuraKencana does not have.”
Sweet deal?
Analysts tracking Yinson generally acknowledge that the acquisition was struck on good terms for the company.
“We deem it an attractive buy given that it was translated to a price-to-book valuation (P/BV) of 0.7 times, a discount to Norwegian peers' forward P/BV of 1.1 times and the 2.5 times 2014 P/BV level that its nearest Malaysian comparison, Bumi Armada, is trading at,” [url=http://archives.thestar.com.my/search/?q=Kenanga Research]Kenanga Research[/url] analyst Cezzane See writes in a note to clients.
Yinson even has to book RM92.3mil in negative goodwill for the proposed purchase, meaning it is being acquired at below fair value. A local bank-backed analyst says that at this price, Yinson is getting FOP's branding and expertise, the latter of which is hard to grow organically, for free.
Another analyst reckons that the first item on Yinson's agenda might be to secure a Petronas license.
Still, not everyone is convinced. “If this was such a fantastic company, then why did the Olsen family sell out?” asks one industry observer.
Kenanga's See also highlights that FOP had previously been in the red, notwithstanding Yinson's assurance that this was mostly a result of non-recurring depreciation charges. As at the first quarter, FOP posted improvements in its top and bottom lines. A filing on its website shows that sales rose 9% year-on-year to US$29.3mil (RM91.4mil) and net profit by a multiple of 12 to US$3.5mil (RM10.9mil) from US$302,000 (RM942,240).
An analysts who covers Bumi Armada cautions against the euphoria around Yinson's shares, saying it has run ahead of fundamentals. At Friday's close of RM4.72, Yinson was trading at 18.2 times forward earnings and 2.3 times book, versus Bumi Armada's 20.8 times earnings and 2.6 times book, according to Bloomberg data.
Moreover, it is difficult to look past Yinson's debts, which market observers opine could lead to funding problems later. With archrival Bumi Armada's gearing at a relatively sound 0.9 times, it may well be able to stomach more risk and put in a more competitive bid vis-vis Yinson, industry insiders explain.
Amid the skepticism, the company is keeping a cool head. “Yinson was able to win jobs even during the low season,” Chern Yuan quips. “We expect to be a strong contender now. There is a lot of pent-up demand for FPSOs because many jobs were not awarded over the past two years.
“In terms of asset size, we are not far behind Bumi Armada. FOP also has a longer history and track record. The acquisition is a strong signal that we want to expand. I don't think we are satisfied with No. 6. We aim to break No. 5 and keep growing.”