Ezion Holdings - Fortified balance sheet
- Cut FY16-17 earnings by 32-37% after pushing back deliveries and lowering margins.
- Recurring PATMI (excluding forex) made a new low of US$5.9m.
- Positive OCF and lower gearing provide buffer to weather through the downturn.
- BUY Ezion as one of the best proxies to ride oil recovery; TP adjusted to S$0.56.
Maintain BUY on Ezion
- Maintain BUY on Ezion; TP adjusted to S$0.56, following earnings revisions, still based on 0.6x FY16 P/BV. We trimmed FY16-17 forecasts by 32-37% after pushing back vessel deliveries and lowering margins.
- Nonetheless, we believe core earnings are near bottom and comforted by Ezion’s positive OCF and lower gearing which are much needed in this environment.
- Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balances.
- Rerating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017, and successful diversification of its customer base to win new charter contracts.
3Q16 earnings disappointed on lower revenue and margins.
- Revenue fell 4.7% q-o-q to US$79.8m and gross margin contracted to 17.5% in 3Q16 (vs 21.3% in 2Q16 and 29.0% in 3Q15). As a result, recurring PATMI (excluding forex) made a new low of US$5.9m. The lower revenue was due to the off hire of one service rig, which outweighed the commencement of a new service rig in September for windfarm.
- Depreciation expense crept up to US$38.1m, from US$36.9m (2Q16).
Windfarm venture shaping up.
- China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China.
- Ezion has signed an MOU with one of the top five IPPs in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for China windfarm is expected to commence in 1Q17.
- We value Ezion based on 0.6x FY16 P/BV, arriving at a target price of S$0.56. This implies 71% upside potential.
Key Risks to Our View
Rate reduction and contract terminations
- We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to low-base effect. We have prudently assumed that rates will reduce by 15%/10% p.a. in FY16/17. Five service rigs are due for charter renewals in FY17.
- 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.
- Competition may be keener ahead with more new entrants attracted to the growing liftboat market.