Ezion Holdings (EZI SP) - UOB Kay Hian 2017-05-15: 1Q17 Revised Operational Guidance Appears Shaky, Downgrade To HOLD.

Ezion Holdings (EZI SP) - UOB Kay Hian 2017-05-15: 1Q17 Revised Operational Guidance Appears Shaky, Downgrade To HOLD. EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings (EZI SP) - 1Q17 Revised Operational Guidance Appears Shaky, Downgrade To HOLD.

  • Ezion reported a headline loss of US$12.7m as forewarned. Excluding the forex loss of US$13.3m, core earnings reported a barely profitable quarter of US$0.5m. The revised operational guidance seems prone to further slippages. 
  • Quarterly core earnings, while at a historical low, could go lower on mobilisation costs and lower dayrates. Cut earnings by 61-67% on this development. 
  • Downgrade to HOLD, with a lower target price of S$0.33 based on 0.5x 2017F P/B. Entry price: S$0.28.



RESULTS


Headline loss as forewarned, core profit comes in at US$0.5m. 

  • Ezion Holdings (Ezion) reported headline net loss of US$12.7m for 1Q17. As forewarned by its profit warnings, the forex loss was due to a depreciation of the USD against the SGD for its SGD-denominated debt. Excluding the forex loss of US$13.3m, a core net profit of US$0.5m was reported. 
  • The weak 1Q17 came in within our expectations, as we had anticipated a 1Q17 comparable to 4Q16 before the start of its operational ramp-up in 2Q17. 
  • The weaker core earnings in 1Q17 was due to a decline in revenue (-16.4% yoy, - 5.6% qoq) as the number of vessels fell by one to 14 vessels (4Q16: 15 vessels).

EBITDA margin remains robust at about 59%. 

  • Despite the weak bottom-line performance, EBITDA was US$40.4m in 1Q17 (-22.3% yoy, -5.9% qoq). The lower EBITDA was due to the loss of revenue as one vessel came off work during 1Q17. 
  • On a core EBITDA margin level, it was comparable on a qoq basis at 58.9% (4Q16: 59.1%, 1Q16: 63.4%).

Net gearing creeps up to 100% due to lower equity. 

  • Net gearing crept up to 100% in 1Q17 (4Q16: 98%), largely due to currency translations and the lower equity base in 1Q17 vs 4Q16. For 1Q17, Ezion made a net debt repayment of US$21.7m (1.5% of gross debt). 
  • Management intends to continue paring down its debt over the coming quarters.


STOCK IMPACT


Operational recovery runs into headwinds. 

  • Ezion had previously guided for an operational recovery to take place within 2Q17. However, it appears that this outlook is now being pushed to the right. 
  • The risk of the operational recovery slipping into late-2H17 is high, as the situation on the ground is fraught with uncertainties. 
  • The fluidity of the situation renders any guidance out of date in a matter of weeks, and we are concerned that the current guidance will change again in the coming quarter.

Vessel guidance for end-17 slips by one to 21. 

  • Of the 26 vessels delivered, the number working fell from 15 to 14 vessels in 1Q17 as Unit #23 came off work. Our records pointed to existence of a two-year option for the vessel, so clearly it was not exercised. Working vessel guidance for end-17 has now slipped from 22 to 21.

Deployments have started, but the outlook is shaky. 

  • By 1H17, Ezion expects to have two more vessels deployed: Unit #24 to start its offshore wind installation job in China, and Unit #5 to start work in Middle East. For the latter, it is subject to the outcome of ongoing negotiations as the deployment was delayed. 
  • By end-17, Ezion targets to deploy another five more vessels, bringing total vessel deployments to 21. The deployment schedules are as follows: Unit #9 (Middle East, 3Q/4Q17), Unit #13 (China wind farm, 3Q17), Unit #18 (Caspian Sea, end-17), Unit #23 (India, 2H17) and Unit #31 (Middle East, end-17).

Earnings at historical lows, but could slip further. 

  • The quarterly core profit of US$0.5m is at a historical low. Assuming no addition of units working in 2Q17, the mobilisation costs for Unit #24, estimated as a one-off expense of US$3m, will likely swing results into a quarterly loss. 
  • It is uncertain whether the operational recovery will generate earnings as previously anticipated as dayrates now appear to stay lower for longer, while existing charters could face dayrate resets on re-tendering.


EARNINGS REVISION/RISK


Cut 2017-19 core earnings by 61-67%. 

  • We have revised our earnings, which assume a successful execution of its revised deployment plans. Our revised core earnings over 2017-19 are US$10m (-66%), US$11m (-67%) and US$16m (-61%) respectively. 
  • In the event that Ezion does not deploy all of its vessels as per plan (ie only 14 vessels remain at work with no further units coming off work), we estimate our core earnings for 2017 to decline to US$5.5m (-46% yoy), which represents another decline from core earnings of US$8m in 2016.


VALUATION/RECOMMENDATION


Downgrade to HOLD, target price lowered to S$0.33. 

  • The situation on the ground remains messy, and the recovery protracted. Given the multitude of operational factors impacting guidance despite the improvement in the oil price, we opt to err on the side of caution. 
  • Downgrade to HOLD, as we opt to wait for the operational deployments to be reflected in their bottom-line numbers. 
  • Our target price is benchmarked to 0.5x 2017F P/B, as we re-instate our 20% discount. Entry price: S$0.28.
  • Key risks: Another company liquidation event within the Singapore O & G space that impacts the banks’ confidence in providing financing, or oil price revisiting the subUS$40/bbl level and remaining so for a prolonged period.




Foo Zhiwei UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-15
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.33 Down 0.450



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