Ezion Holdings - Still bogged down by rig downtime

■ 3Q15 earnings affected by rig downtime

■ But manageable capex with no likely near-term refinancing risks

Reiterating Buy (1) rating; cutting target price to SGD0.87

What's new:
Ezion has announced its 3Q15 results, with revenue and PATMI of USD86.2m and USD30.3m (9.1% and 38.4% lower YoY, respectively). The 9M15 PATMI of USD100.3m is equivalent to 61% of our full-year 2015 forecast, due to persistent downtime for its service rigs for maintenance. Management believes the current oil and gas sector downturn will persist for the next 12-18 months.

What's the impact:
Weak 3Q15 as downtime persists. The 3Q15 PATMI remained weak and was below our and the Bloomberg consensus numbers. This was due to persistent downtime for its service rigs, meaning that despite taking delivery of 26 rigs as at 30 September 2015, only 18 were operating for 3Q15 vs. 19 for 2Q15. Management guided that its operational rigs would rise to 21 units by year-end, with a total of 28 delivered units to be delivered for 2015.

2016 earnings growth. Management acknowledged that the current operating climate is more challenging than it had previously envisaged, as clients have been trying to negotiate wider terms, but at lower rates. However, no rate cuts have been given granted, although payment collections are now more onerous when it comes to NOC clients like PEMEX. Despite Ezion’s current operating difficulties, management believes the utilisation rate has bottomed out. With 9 more rigs to contribute to the bottom line in 2016, earnings are likely to have bottomed out as well, in our view.

Capex needs manageable, buffered by visible cash flow. Management has guided it will incur additional USD350m in capex until end-2016. Thereafter, our maintenance capex assumption stands at USD20m p.a. The net gearing is likely to rise to 1.2x by end-2015, with the redemption of its perpetual securities, but this should be partially buffered by the strong operating cash flow of USD275m for 2015E. We expect Ezion to turn free cash flow positive in 2016, once it takes delivery of all 37 contracted rigs.

EPS changes. We cut our 2015-16E EPS by 2-14%, in line with our lower revenue assumptions. The 2015E revenue is being affected by higher rig downtime due to maintenance-related issues, while our 2016 revenue recognition assumption now assumes a slower rig delivery schedule.

Technical Analysis
Daily Chart
What we recommend:
We reiterate our Buy (1) rating and cut our SOTPderived 12-month TP to SGD0.87 (from SGD0.94). We attribute the lower TP to our higher net debt assumption. We value the liftboat/service-rigs division using a DCF methodology, given the strong cash flow visibility from its long-term contracts.

Key risk: persistent delays in asset deployment, which would affect the overall utilisation of Ezion’s fleet.

How we differ:
Our 2015-17E EPS are 1-15% below consensus due to our lower revenue and net profit assumptions, as we expect no new contracts to be awarded, with existing service rig contracts unlikely to be renewed upon expiry. (Read Report)

Read Related Reports
1) Ezion Holdings - Earnings bottoming out by DBS Group Research, published on 13 November 2015

2) Ezion Holdings - More downside risks next year by KGI Fraser Research, published on 13 November 2015

3) Ezion Holdings - Decent results and in line‏ by OCBC Investment Research, published on 13 November 2015

4) Ezion Holdings - Trying Tough Trough Times‏ by RHB Research, published on 13 November 2015

5) Ezion Holdings - Finding a floor to earnings by CIMB Research, published on 12 November 2015

6) Ezion Holdings - Still generating shareholder value by Maybank Kim Eng Research, published on 12 November 2015

Source : Daiwa Capital Markets

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