Ezion Holdings - DBS Research 2017-02-24: Positive initiatives to manage cash flow

Ezion Holdings - DBS Vickers 2017-02-24: Positive initiatives to manage cash flow EZION HOLDINGS LIMITED 5ME.SI

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.


Valuation

  • 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.




HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2017-02-24
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.62 Up 0.560



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