Ezion Holdings (EZI SP) - UOB Kay Hian 2016-10-13: Cash Flow Issues Being Addressed But It’s Not Hunky Dory Thereafter

Ezion Holdings (EZI SP) - UOB Kay Hian 2016-10-13: Cash Flow Issues Being Addressed But It’s Not Hunky Dory Thereafter EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings (EZI SP) - Cash Flow Issues Being Addressed But It’s Not Hunky Dory Thereafter

  • Investors were mainly concerned over Ezion’s cash flow and debt refinancing plans.
  • The refinancing, expected to be completed by end-16, would put Ezion in a cash flow neutral position. To mitigate the downturn and its tight balance sheet, Ezion will adjust its 2017-18 capex accordingly and continue pursuing its diversification strategy. Fundamentals point to challenging conditions ahead till at least 2H17.
  • Maintain HOLD. Target price: S$0.30. Entry price: S$0.27.


WHAT’S NEW


Key issues: Debt refinancing and cash flow. 

  • Ezion saw keen investor interest on these two issues. Poor utilisation and lower dayrates saw operational cash flow decline from US$149m in 1H15 to US$58m to 1H16, leading to concerns over Ezion’s ability to meet debt repayment of over US$1b in the next few years.

Extending bank loan repayment period from 5 to 8 years. 

  • Prior to the downturn, Ezion enjoyed high dayrates that allowed debt repayment on its service rigs within five years. The downturn has since made that difficult, and Ezion is seeking to extend the repayment period from five years to eight years. This would allow principal repayment to match its current operational cash flows. It is currently in negotiations with its banks (DBS, OCBC, UOB and Maybank) on refinancing terms, and expects to complete this by end-16.

Adjusting capex plans to address volatile environment. 

  • Current capex guidance for 2016-18 is US$100m, US$200m and US$160m respectively, with 2017-18 conditional on market conditions. Ezion has delayed delivery of six newbuild service rigs for one year due to the downturn and remains in close discussion with clients, banks and yards on the rigs’ delivery dates.

Confident of meeting bond payments over 2018-21. 

  • Of the US$379m in outstanding MTN bonds, the earliest bond matures in Aug 18, with a notional of US$42m. The remaining 89% matures over 2019-21 (see table overleaf). Ezion is confident that market conditions would improve by then and it will be able to repay these bonds in full. 
  • Furthermore, it expects that an improvement in share price would see the exercise of its 355m warrants, unlocking US$120m in cash.

China offshore wind farms unaffected by recent tariff cuts. 

  • Management commented that its Chinese offshore wind farm projects were unaffected by recent tariff cuts for renewable energy. The cuts were specific to onshore solar and wind projects.


STOCK IMPACT


Consensus too bullish on Ezion’s operational cash flow. 

  • We infer from the extension duration that steeper-than-expected dayrate reductions were incurred in the downturn, likely to the tune of 20-25%. Going by this, we think operational cash flow for 2016 is also likely to be lower than current consensus of US$190m-200m.

Volatile oil price outlook makes full deployment of 37 service rigs unlikely. 

  • The outlook for oil prices remains volatile, and this is unlikely to translate into better dayrates for Ezion’s service vessels. Given management’s remarks, we think the continued weak environment strengthens a case for less than 37 rigs being operational by 2018.

Post refinancing exercise, cash flow to still remain tight. 

  • While we are reassured by the active management of its balance sheet and cash flows, we note that Ezion continues to face challenges while oil prices remain volatile. 
  • Refinancing addresses the mismatch between debt repayment and operational cash flow, moving Ezion from cash flow negative to cash flow neutrality. Higher interest expense is to be expected. 
  • Between now and the eventual recovery, Ezion will be cash tight as it juggles capex commitments and maintaining sufficient cash reserves for the remainder of the downturn.

Expect a recovery in 2H17. 

  • Given the continued volatility in oil prices, dayrate relief previously granted are likely to remain in effect. We understand that 2H17 will probably be the earliest when oil prices stabilise enough for dayrates to improve, and remove any overhangs on balance sheet issues.


EARNINGS REVISION/RISK

  • No change to our earnings estimate.


VALUATION/RECOMMENDATION


Maintain HOLD and target price of S$0.30. 

  • Fundamentals have yet to improve although improved sentiment in oil prices has lifted share price lately. 
  • While we expect successful bank refinancing due to greater willingness by banks to help, the uncertain business outlook leaves us hesitant to upgrade our valuation multiple. Yet, trading opportunities persist in the volatile environment, and we reiterate trading range of S$0.24-0.37, based on -2SD to -1SD P/B multiples for Singapore OSV owners. 
  • Maintain HOLD and target price of S$0.30, benchmarked to 0.4x 1-year forward P/B. Entry price is S$0.27.


SHARE PRICE CATALYST

  • Higher oil prices.




Foo Zhi Wei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-13
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.30 Same 0.300



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