Ezra - Kitchen-sinking quarter erodes equity
- One-off items totalling c.US$350m drag down headline profits in 4Q16; net gearing jumps to 3.0x.
- EMAS Offshore losses widen; Triyards margins under pressure.
- Covenant waivers provide some breathing space.
Continue avoiding the stock.
- We maintain our FULLY VALUED call as we believe balance sheet risks remain high for the stock and with no still no operational turnaround in sight.
- The OSV segment (EMAS Offshore) continues to make deeper gross losses, highlighting the persistent weakness in the OSV market.
- The fabrication segment (Triyards) remains the sole profit centre but is increasingly showing cracks in its armour – lower margins due to a higher proportion of non-O&G projects and slowing order win momentum.
- Despite some temporary breathing space obtained from the successful consent solicitation exercise (CSE) relating to its S$150m 2018 note, which granted Ezra waivers of covenant breaches and certain negative pledges related to refinancing/rescheduling of bank debt, we think the US$43m put option exercisable by Perisai (see next page) and the maturity of the aforementioned S$150m note in April 2018 remain key risks amidst continued stress expected on cash flows.
One-off items depress 4Q16 profits.
- Ezra posted a kitchen-sinking quarter with c.US$350m in one-off items (see pg.2 for more details) resulting in core losses of about US$69m by our estimates – below expectations. Headline PATMI losses came in at US$339m, which has eroded the equity base, causing net gearing to jump from 1.38x in 3Q16 to 3.00x currently.
Losses to persist as industry remains moribund.
- We are forecasting US$148m/US$140m of losses in FY17/18 primarily stemming from losses at EMAS Offshore and the associate/JV level (subsea division), weighed down further by interest costs.
- Challenging fundamentals and a lack of positive sentiment should provide downward pressure on the stock.
- We maintain our FV call with a revised SOTP-based TP of S$0.036, and accounting for lower book values post impairments.
Key Risks to Our View
- The Perisai put option lapsing and Ezra’s bankers backing a repayment of the S$150m note could relieve some negative sentiment related to balance sheet risks.
- Alternatively, if oil prices jump sharply to US$60/bbl level and beyond, we could see its share price moving upwards in tandem.