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Ezion Holdings - Delayed Resurrection

Shared By Stock Fanatic on Tuesday, April 17, 2018 | 17.4.18

Ezion’s successful restructuring puts it on the path to recovery, and could result in a multiples re-rating. However, valuations are highly dependent on conversions by shareholders and security holders. Current book value is closer to 15.1 S cents assuming 50% conversion by Series B security holders. Share price of S$0.197 is at a premium to that of peers who have significantly lower debts. Upgrade to HOLD and raise target price to S$0.18, pegged to 1.0x 2019F P/B. Entry price: S$0.151.

Post-restructuring, book value starts at 12.4 S cents without conversions. The likelihood of conversions by warrant holders and security holders is uncertain as they are currently out of the money, with the exercise price at a premium to book value. Without conversions, Ezion Holdings’ (Ezion) fully-diluted book value of 21 S cents is unlikely to be realised, and current book value post-restructuring is closer to 12.4 S cents.

No more than 1.0x 1-year forward P/B valuation. Peers that have emerged from bankruptcy are trading at close to 1.0x P/B. Local peer Marco Polo Marine, which has no debt left, is trading at 1.1-1.2x NTA. While Ezion should turn profitable, this is weighed against its excessive net gearing of 785% relative to peer average of 124%. The current 26% premium to book is unwarranted, and a fair valuation should not exceed 1.0x 1-year forward P/B, in our view.

Restructuring buys six years of time. Post-restructuring, Ezion has six years’ time to generate sufficient cash flow to partly repay banks and security holders. Reduced interest expense and minimal debt repayment should facilitate this. We estimate that current debt of US$1.5b can be reduced by 35% at the end of six years without conversions.

Balance sheet improving, but equity shareholders take a backseat. With the impairments, Ezion’s service rig fleet is now profitable at the gross level. With this and the reduced interest expense, a return to profitability is expected. Balance sheet is expected to improve, but until Ezion’s debts are settled, little to no cash flow will be attributable to shareholders.

Technical Analysis

Daily Chart
Upgrade to HOLD, target price raised to S$0.18, pegged to 1.0x 2019F P/B, a premium to peer average of 0.8x 2019F P/B. Current valuations imply 1.2x 2018F P/B, which seems high considering that Ezion’s balance sheet remains highly geared. The company may be on the path to recovery, but investors should position cautiously given the restructuring. Share price is expected to trade downwards towards Ezion’s adjusted BVPS of 15.1 S cents in the near term. Upgrade to HOLD.

■ Ezion will resume trading on 17 Apr 18, at 9am. (Read Report)

Source : UOB Kay Hian Research

Posted on Tuesday, April 17, 2018 | 17.4.18
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