How much for Yinson?

HOW much would you accept for a buyout of Yinson Holdings Bhd? This is the billion-dollar question amidst rumours that the company’s major shareholder and a US fund are planning to privatise the company.

Currently, this is purely academic as Yinson has clarified that it isn’t in discussions with third parties about a buyout.

However, the company has mentioned that its group executive chairman, Lim Han Weng, indicated that the major shareholders are exploring discussions with various parties regarding potential corporate proposals for their shareholding in Yinson.

The Lim family owns 27% of Yinson, making it the single largest shareholder.

It only makes sense that after funding this company extensively through share purchases, and with the market not ascribing the group a high valuation, the Lim family could be looking to either sell or partner with a group with deeper pockets and even bigger ambitions in the floating production, storage and offloading (FPSO) scene.

Hypothetically speaking, if a buyout offer was made for Yinson shares, how should existing stock owners react?

This question would be relevant to some of our biggest government-linked investment companies (GLICs). The Employees Provident Fund (EPF) is the second-largest shareholder of Yinson with a 17.7% stake, followed by Kumpulan Wang Persaraan (Diperbadankan) (KWAP) with 7.1%. A host of other local and foreign institutional investors hold shares in Yinson, which has a market value of RM7.3bil.

So what will be an attractive take out price for them (and of course all the retail investors in the stock as well)?

First up is the fact that Yinson trades at a low price earnings (PE) multiple. Prior to the latest news about Lim and a US fund planning to privatise the company (and which has caused the stock to pop by some 15%), Yinson traded at a PE multiple of under six times. This has now gone up to 6.3 times.

Why has the market been ascribing the company such a low PE? One reason is because investors struggle to see beyond the fixed term contracts of the FPSOs. Once a contract is done, what then?

That said, with over US$20bil in contract backlog, Yinson has visibility into the next decade.

Still, FPSOs are custom-engineered for specific fields and as a result, redeployment is difficult, requiring substantial adaptation, including retrofitting, which can be time-consuming and costly.

This is probably why Bumi Armada Bhd also trades at a historical PE multiple of under five times. These are not small companies. Bumi Armada is the world’s fifth-largest FPSO lease contractor in the global oil and gas industry, with Yinson ranking sixth.

The first indication of a buyout price was a wire report speculating on the buyout offer, which it said would value Yinson at RM9bil. This would work out to a share price of around RM3.23, giving the investor a gain of 37% based on the latest price and more than 60% based on the RM2 share price where the stock hovered at about a month.

Should investors insist on a higher take out price? After all, analysts have been very bullish about this stock – the consensus price target for Yinson’s shares is RM3.54. All the 10 analysts covering the stock have a buy call on it, Bloomberg data show.

But Yinson trades at loftier forward earnings. Its forward PE stands at 15 times, compared with Bumi Armada’s five times and Japan-listed Modec Inc’s 11.8 times.

Another concern for Yinson is its debt – RM16bil excluding perpetual securities of RM1.94bil. Questions arise occasionally whether it will have sufficient cash flows to support those debt levels.

Some opine that Yinson’s debt levels are only to be expected given the capital-intensive nature of the business. In addition, Yinson has been able to manage its debt and meet obligations all this while.

Then there are the overarching concerns about the oil and gas sector, amidst the uncertain economic times. There is a school of thought that reckons now is the time for a new profile of investor to come into Yinson and take the company forward.

For example, reports indicate that the Organisation of the Petroleum Exporting Countries and its allies (Opec+) is prepared to allow oil prices to ease into the US$55 to US$60 per barrel range, from US$65 currently, in a bid to introduce uncertainty into the investment plans of rival producers.

For FPSO players like Yinson, while existing contracts would remain stable due to their long-term lease structures, this development may affect future FPSO projects should upstream players curtail capital expenditure or defer some FPSO investments.

This is why there is a school of thought that believes it is time for a new profile of investor to come into Yinson, with fresh capital and the ability to endure the current stresses, embark on more bolt on investments and emerge as a world leading FPSO player by the time the next oil upcycle comes.

All is well and good if such a plan is being hatched, but existing shareholders of Yinson ought to know their rights and argue for a takeout valuation that they deem fit, considering all factors involved.

Shareholders ought to know their rights and ensure that the offerers secure 90% acceptance of shares they do not own at the point of making the offer.

They should not give in to the tactic used in offer documents that say that companies’ shares will be suspended once the shareholding spread drops below 10%.

Not wanting to sound like a broken record, but something needs to be done to address the listing rule that facilitates this tactic that lets offerers bypass protection for minority shareholders as enshrined in the country’s Takeover Code.

The worst-case scenario for Yinson amidst all this buyout talk is if there is no deal. This is possible as many things could fall apart during negotiations.

In that case, where will Yinson’s share price be in three to six months? Probably back to the lower valuation the market has been ascribing it all this while. Hence, those buying into the stock on the hope of a buyout deal could be a disappointed bunch. Buyers beware!