AMS’s withdrawal of lawsuit eliminates a key overhang
We reiterate our conviction BUY on Ezion as we believe its stock
price would soon recover to the S$1.20 level, prior to the
emergence of a dispute with rig-operator partner Atlantic
Marine Services (AMS), following AMS’s withdrawal of its
lawsuit against Ezion. It is a win-win situation that both
companies are now looking to continue the partnership in the
North Sea after a change in AMS’s management.
Rising liftboat demand drives growth
Ezion is well-positioned to benefit from the rising popularity of
liftboats in this region, capitalising on its first-mover advantage.
We believe service rigs are in an early growth phase, buoyed by
the substitution effect to replace typical work boats/barges in
this region. Ezion has taken delivery of 22 service rigs and the
fleet is expected to grow to 33 units by end of 2015, and 37
units by 2016, propelling earnings CAGR of 26% in 2015-2017.
Resilient in low oil price environment
Ezion has a prudent business model. Fleet expansion is backed
by long-term charters of 3-5 years. Demand is also relatively
more resilient as service rigs are exposed to the production
phase in the shallow water segment. Only 10-20% of Ezion’s
fleet, largely in Mexico, are deployed for developmental drilling
which see relatively higher risks of cancellations amid low oil
We value Ezion at 8x FY15 PE, to derive a target price of S$1.50.
This represents a valuation of 0.5SD below its historical mean.
Key Risks to Our View:
Rate reduction and contract terminations
We estimate that every 1% decline in average dayrates will
reduce bottomline by 2%
. We have prudently assumed a 5%
rate reduction in FY16. Five service rigs are due for charter
renewals in FY15-16. So far, three have been renewed at similar
rates. Besides, the Mexican contracts appear to be at risk of
termination as these consist of the few units that are deployed
for drilling and there have been several cancellations in that
region, though no such indication from PEMEX thus far. (Read Report)
Source : DBS Group Research
Labels: Ezion Holdings, Offshore Marine Sector