Ezion Holdings - Positive initiatives to manage cash flow
- 4Q16 earnings below expectations on impairment losses and lower utilisation.
- Indefinite postponement of four new service rigs reduces capex by US$270m.
- Successful revision of debt repayment to match cash flow generation alleviate balance sheet stress.
- Maintain BUY; TP S$0.62.
Maintain BUY on Ezion; TP lifted to S$0.62, based on higher PB multiple of 0.7x FY17 impaired book (0.6x previously).
- We have slashed FY17-18F earnings by 22-55% after pushing back vessel deliveries.
- Nonetheless, we believe core earnings are near bottom and we are comforted by Ezion’s positive operating cash flows 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 balance.
- Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017/2018, and successful diversification of its customer base to win new charter contracts.
4Q16 earnings disappointed on impairment and lower utilisation.
- Ezion’s reported a net loss of US$66.6m in 4Q16, resulting in full year losses of US$33.6m. 4Q16 was dragged by US$70.9m impairment on assets and receivables as guided.
- Core profit in 4Q16 was also weaker, with 9% q-o-q decline in revenue to US$72.6m, due to lower utilisation and gross margin contraction of 5.4ppts to 12.1%. The lower revenue was due to the off hire of two service rigs.
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 approximately only 2.5GW offshore wind capacity installed.
- A liftboat would facilitate installations of 200MW offshore wind capacity a year. Assuming 27.5GW of wind capacity to be installed over the next five years or 5.5GW per year, there would 25-30 liftboats required in China.
- Ezion has signed an MOU (Memorandum of Understanding) with one of the top five largest state-owned power generation enterprises in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for a China windfarm is expected to commence in 1Q17.
- We value Ezion based on 0.7x FY17 impaired book, arriving at a target price of S$0.62. This implies 57% 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 a low-base effect.
- We have prudently assumed that rates to fall by 10% in FY17. Five service rigs are due for charter renewals in FY17. Meanwhile, the Mexican contracts appear to be at risk of termination as these consist of a 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.