Yinson’s RM16bil debt too big to ignore

IT is no secret that Yinson Holdings Bhd has been piling on borrowings to fund its projects, but with total debt crossing RM16bil or more than double its market capitalisation, the indebtedness issue has become too glaring for shareholders to ignore.

The fact that the group sits on negative operating cash flow and that nearly 90% of its debt is US dollar-denominated have also added further concern.

To put it into perspective, Yinson’s business is capital-intensive in nature as it builds floating production, storage and offloading (FPSO) vessels for the oil and gas (O&G) sector.

For example, its Agogo FPSO alone could cost US$1.8bil (RM8.5bil) in capital expenditure, as estimated by CGS-CIMB Research last August.

Earlier this month, Yinson secured a term-loan facility of up to US$1.3bil to fund the delivery of the Agogo FPSO.

The financing, comprising three tranches with staggered maturities of up to 10 years post-FPSO delivery, is provided by a consortium of 13 lenders, including international banks and institutional investors.

Prior to announcing this new loan facility, Yinson had reported a total debt of RM16.4bil in its financial statement for the year ended Jan 31, 2024 (FY24).

Of this, about RM15bil is long-term debt, while the remaining RM1.4bil is short-term in nature, according to Bloomberg.

In the last five financial years, Yinson’s debt level has ballooned by more than four-fold. In FY20, total debt stood at RM3.86bil but by FY24, it has shot up to RM16.43bil.

For comparison, Yinson’s market capitalisation is currently at RM7.7bil.

Checks by StarBizWeek found that Yinson is one of the top five net debt public listed companies in Malaysia, excluding government-linked entities.

As borrowings grow, Yinson’s net gearing ratio in FY24 also rose to 1.66 times as compared to 1.23 times in FY23.

“The increase in the group’s net gearing ratio is primarily the result of the group’s higher leverage on additional loans and borrowings drawn down to fund project execution needs, which was moderated by the group’s enhanced total equity position of RM7.98bil,” Yinson says in its latest results filing.

Being high in debt does not necessarily mean a business is badly maintained.

As long as the borrowings are channelled into productive means such as financing value-accretive projects, instead of paying dividends for example, the debt could yield better returns in the long run.

In the case of Yinson, shareholders can breathe a sigh of relief that the drawn-down borrowings are being used as working capital for long-term projects.

It is noteworthy that the group has an order book of over US$22bil that sustains until 2048.

This is perhaps a reason why all nine analysts covering the stock have “buy” calls. Nevertheless, Yinson’s high debt level exposes it to the risk of missing loan repayments, in the event of project failures or delays that could disrupt its operations.

This is exactly what pushed Sapura Energy Bhd, once known as the world’s second largest integrated O&G service provider, to the brink of bankruptcy.

Prior to the mid-2014 oil price crash, Sapura Energy undertook a number of asset acquisitions at premium valuations by taking on large debts.

It was all sound until crude oil prices plunged and the company’s projects suffered losses, leaving Sapura Energy unable to service its debts.

It is, therefore, necessary for shareholders – especially the minorities – to continuously monitor Yinson’s approach in managing its debt levels.

Balance sheet concerns aside, Yinson remains optimistic about the future of its businesses, including renewables and green technologies.

The renewables segment incurred a loss of RM41mil in FY24, following a loss of RM129mil in the previous year.

Meanwhile, the green technologies segment also reported a loss of RM23mil in FY24 compared with a loss of RM28mil in FY23.Despite the losses, Yinson’s overall net profit in FY24 jumped by 64% year-on-year to RM964mil, as revenue rose by 84% to RM11.6bil.

“The FPSO market continues to see strong demand for contractors like Yinson, who have an edge in emissions reduction technologies and a solid track record of on-time delivery and safety and operational performance.

“The demand for FPSOs is positive with the increase in project sanctions around the world particularly from Brazil, being the highest FPSO demand centre, followed by West Africa,” it says in its FY24 results filing.On persisting market risks, Yinson assures shareholders that it is well positioned to face the uncertainties with robust risk and internal control management in place and the implementation of robust cost control management.

According to Maybank Investment Bank Research, in a March 24 note, Yinson is expected to register “record high earnings’’ in FY25 and FY26.

This is following FY24’s core net profit of RM926mil, which the research house says is a record high.

“We believe that earnings will reach new heights as both FPSO Maria Quiteria (MQ) and FPSO Atlanta achieve first-oil and Yinson starts recognising bare boat charter in FY25 and FY26.

“We note that FPSO MQ and Atlanta are on track for delivery in 2024.

“Yinson has guided that it would be looking for new jobs in the mid-sized segment (projects that are bankable with high upfront payment from end-client),” it says.