Ezion Holdings - ‘Lift’ed sentiment on higher 2017F crude oil price
- Higher crude prices in FY17F will cap downside risks in DCRs for Ezion in FY17- 18F, in our view.
- Expect more vessels to be contracted, with maintenance work returning.
- Impairment risks could be lower now as asset prices need not be adjusted as much.
- Raise FY17-18F EPS by 32.6-50.3% on lower charter cuts and fleet being contracted.
- Upgrade to Add from Hold, with TP of S$0.44 (vs. S$0.33, previously), based on increased 0.45x FY17F P/BV (vs. 0.30x previously), tracking ROE of 4.5%.
Higher crude oil prices of US$45-60/bbl in 2017F
- We project a higher crude oil price range of US$45-60/bbl in 2017 (vs. 2016F’s average US$43.5-44.9/bbl), on OPEC and Russia’s move to curb production.
Shallow-water production and maintenance work to be prioritised
- We believe production and maintenance activities will be prioritised given they account for part of the opex spend. This will be a boon for vessel players within the repair, maintenance and accommodation segment, including Ezion, in our view.
Reduce forecasted cuts in DCRs in FY17-18
- Given that we expect higher maintenance and activity levels, we believe Daily Charter Rate (DCR) pressures would be lower heading into 2H17F. Previously we had projected that DCRs would be cut by 15% p.a. However, we now project a 12% cut in FY17 and a 5% cut in FY18.
- We have forecasted a more stringent cut for FY17 versus FY18 as we believe any real impact will only be felt by end-17.
Increased fleet count in FY17-18F
- We have also become more confident on contracting prospects for Ezion’s vessels as we expect the crude oil sector environment to improve.
- We forecast three more vessels to come in from 4Q17, raising FY17F vessels to 24 (from 21 forecasted previously), and two of these three vessels to contribute for the entire FY18F, raising vessel count to 28 (from 26).
Lower impairment risk from increase in crude oil price
- While we still expect impairment risks in 4Q17, we believe such risks may be lower now given the crude oil price has averaged higher in 2016F, and should be on a gradual uptrend in 2017F, in our view.
- Ezion has also offered to buy three assets from its JV Swissco. While no pricing detail has been disclosed, we will wait to see if there is significant impact from the purchase.
FY17-18F EPS increased by 32.6-50.3%.
- To reflect our assumptions for lower DCR cuts and increased number of vessels, we raise our FY17-18F revenue by 9.3-18.5%.
- However, our upward earnings revisions are are more significant at 32.6% and 50.3%, respectively, as we now forecast that those three new vessels will achieve GP margins of c.30% versus the losses we were assuming previously, when they were delivered but uncontracted.
Upgrade to Add with higher TP of S$0.44 (from S$0.33, previously)
- We have turned more positive on Ezion’s prospects. While profitability is not back to where it once was, we like that it sits in the “right” part of the value chain. Also, positive operating cashflow means it should be able to ride out 2017, in our view.
- On the valuation front, we believe Ezion is still attractive, trading at a discount of greater than 1 s.d. relative to its 5-year mean P/BV of 1.0x, implying downside risks could be priced in.
- Risks to our call are lower DCRs and fewer contracted vessels.