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Ezion Holdings - Cash Is King

Shared By StockFanatic on Wednesday, April 30, 2014 | 30.4.14

The rationale behind Ezion’s corporate moves is to stay focused on its liftboat/service rig business. We estimate that with its recent share placement of 110m shares and 2014-16’s strong operating cash flows, Ezion could add 16 service rigs to its current fleet of 33 vessels. This could lift 2016-17’s annual net profit by 40%. 

Maintain BUY. Target price: S$2.62.

Very much focused on the liftboat/service rig business. Ezion has re-iterated its primary focus is its liftboat/service rig business. 

Management has stressed that there are three key considerations in all its corporate moves
- To free up Ezion's management time for the liftboat/service rig business, as it is still growing strongly.

- To align internal interests. People who grow the liftboat/service rig business should be rewarded based on the segment's earnings. This is likewise for those running other businesses eg. the marine supply base business.

- Ezion's balance sheet should not be burdened by other businesses' capex. The other units should fund their respective capex commitments.

Cash is king. Aside from the US$155m new equity raised from a share placement of 100m shares to Asia Fountain Investment, a subsidiary of Hong Leong (Malaysia) Berhad, Ezion Holdings (Ezion) is expected to reap strong operating cashflows of US$260-380m p.a. in 2014-16. We forecast Ezion’s shareholders’ fund to double from US$800m to US$1.6b with its net gearing to fall sharply from 115% at end-13 to 33% by end-16. This is after netting off the remaining capex relating to its existing fleet of 33 liftboats/service rigs and prudent annual debt repayments.

Well positioned for the next leap. Assuming 2016’s net gearing could be raised to 1.0x and based on our projected shareholders’ fund of US$1.6b by end-16, we see an additional debt room of US$1.1b. This could potentially fund 16 service rigs at the cost of US$70m each. At an assumed ROA of 11%, we estimate these 16 rigs could add a total annual net profit of about US$120m. This would raise our 2016-17 net profit forecasts by a whopping 40%. Ezion’s existing balance sheet and strong cash flows in the next three years should comfortably fund its next growth phase.

More to follow. The potential demand for liftboats/service rigs in Asia Pacific, Middle East and Africa remains strong. A liftboat is usually used to facilitate the maintenance of a fixed offshore oil & gas production platform. North America has a fleet of 250 liftboats servicing 3,257 fixed platforms, or a ratio of 13 platforms per liftboat. The liftboat fleet in Southeast Asia (SEA), the Middle East and West Africa comprises only 62 units against a fixed platform market of 3,266 units, or a ratio of 53 platforms per liftboat. Obviously, there is a large potential demand for liftboats/service rigs in these markets. 

Traditionally, these markets use work barges (together with other offshore support vessels) in fixed platform maintenance but they post higher safety risks than liftboats, given that they are less stable. Ezion has now built up an impressive client list that includes Pertamina, Petronas, Middle Eastern national oil companies, Maersk Oil, PEMEX, among others. The next step is to ramp up the number of chartered vessels to each client.

New charter contracts to lift 2015-16 earnings forecasts. Our 2014-15 net profit forecasts are relatively unchanged. We initiate our 2016 net profit forecast at US$270m. As our earnings forecasts are based on Ezion’s existing fleet of 33 vessels, there is upside to our forecasts for new contracts secured in the remaining months of 2014 and in 2015. Key risk is competition but there is a lead time of at least two years, in our view.

Technical Analysis
Daily Chart
Maintain BUY. We raise our target price from S$2.38 to S$2.62, which is based on 2015F PE of 11x or 15% premium to the long-term (2004 to current) 1-year forward PE mean of 9.5x for OSV-owner segment of the oilfield services sector.

• New charter contracts. Earnings forecast revisions on new charter contracts. (Read Report)

Source : UOB KayHian Research

Posted on Wednesday, April 30, 2014 | 30.4.14
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