Ezion Holdings - DBS Research 2017-08-15: Bite The Bullet

Ezion Holdings - DBS Vickers 2017-08-15: Bite The Bullet EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Bite The Bullet

  • 2Q earnings below; gross margin dipped 2.8ppt q-o-q to 9.8%.
  • Engaging lenders and creditors to discuss financing options and capitalisation structure.
  • A pre-emptive measure to enhance survivability; wait for more clarity on the resolution.
  • Downgrade to FULLY VALUED; TP cut to S$0.13.



Downgrade to FULLY VALUED; TP cut to S$0.13, based on 0.15x FY17 book value. 

  • 2Q17 missed estimates as utilisation remained low at 54% and charter rate continue to slide despite improving oil prices. The sudden deterioration of cash balances to US$93m (from US$187m in 1Q17) and the turn of operating cash inflow to outflow in the quarter raise red flags. 
  • The high net gearing of 1.0x, tight credit access, and unexpectedly slow pick-up in business dampen Ezion’s ability to secure refinancing. This has prompted management to take proactive measures to explore financing options with its stakeholders. 
  • Investors should wait for more clarity on the resolution as a successful exercise will help the group pull through this prolonged downturn stronger, and vice versa. Trading has been suspended until further notice.


Unexpected exercise to discuss financing and capitalisation structure with lenders and creditors to enhance survivability.

  • Ezion has notified shareholders that it will work together with all its stakeholders including lenders and creditors to discuss financing options in view of the current operational challenges that will threaten the fundamental viability of Ezion’s business if they persist. The move should enhance survivability of the group.


What to expect next? 

  • Ezion will be meeting all its major bankers soon to finalise details after their initial discussions. Following that, informal meetings with creditors might also be scheduled to gather feedback before launching a formal one. 
  • It seems to us that the process might take several months.


Valuation

  • We value Ezion based on 0.15x FY17 book value (post 12% impairments), in line with valuation multiple of 0.1-0.2x ascribed to other highly geared SGX-listed asset owners in the O&G space, arriving at a target price of S$0.13.


Key Risks to Our View

  • Overhang of debt restructuring. While it might be positive for the long run and Ezion stands a fair chance to pull it through, overhang remains until the completion of the exercise in several months, if successful.


WHAT’S NEW


2Q results below; limelight on exercise to discuss financing options with stakeholders 

  • Ezion reported net loss of US$2.6m despite US$10.6m disposal gain, which was partly offset by forex loss of US$5.8m. Revenue fell 2% q-o-q as the higher offshore logistic revenue was offset by lower charter rate for one of the renewals. Gross margin dipped 2.8% q-o-q to a new low of 9.8%.

Operating fleet was unchanged at 14 units as of end-June.

  • Three additional service rigs were deployed in Middle East and China in July-August, bringing its operating fleet to 17 units in 3Q. 
  • In addition, another 3-4 units are expected to come on stream by end of the year/early next year.

Charter rates still under pressure. 

  • As current contracted rates vary depending on the renegotiation timing, the higher-rate contracts are vulnerable to rate reduction upon renewal.
  • Cash flow deteriorated this quarter with operating cash outflow of US$2.4m (vs inflow of US$26m in 1Q17) on the back of higher working capital. This was exacerbated by higher capex (US$30m) and debt repayment (US$40m), resulting in a sharp decline in cash on hand to US$94m, from US$187m a quarter ago.

Potential impairment. 

  • In its outlook guidance, management cautions that charter rates might remain depressed for the next 12 months; collection of receivables continues to be slow and if the situation worsens, significant impairment might be required. Though, management remains positive that there is demand for Ezion’s service rigs.

Earnings revision. 

  • We have lowered our FY17/18 net profit by 18%/30%, factoring in higher rate reduction by 2.5% in 2017 and 2018, bringing 2017/18 rate declines to 27.5% and 32.5% from original rates respectively. The impact for 2017 is partially offset by the disposal gains booked in 2Q.
  • Discussion with stakeholders on financing options In view of the situation, Ezion has sent out letters to notify shareholders that it will engage all of them, including lenders and creditors in relation to its financing and capitalisation structure.

A proactive move to enhance survivability. 

  • The exercise took the market by surprise as Ezion is seen as one of the “last men standing” among SGX-listed asset owners in the O&G space, given its strong market positioning, positive operating cash flow (up to 1Q17) and decent cash balance. The mutual agreement with bankers in early 2017 to match repayments with cash flow generation has also significantly reduced financial stress during off-hire. While this might be positive for the group's survivability, overhang remains till a positive resolution is reached.

Bloomberg article released on 10 August citing Debtwire’s “Ezion Hires Adviser for SGD1.48b Debt Restructuring” news; trading suspension of securities until further notice. 

  • The article referenced Ezion’s appointment of RSM Singapore as financial advisor in relation to an impending debt restructuring, which includes the SGD-denominated notes. 
  • We note that Ezion has neither specifically acknowledged nor refuted the news article in its announcements thereafter. 
  • Since 14 August 2017, Ezion has also suspended trading of its securities, in anticipation of having to reach out to “bank lenders and creditors to discuss the Company’s financing and capitalization structure”. Management clarifies that there is no imminent going concern issue for the next few quarters and the suspension was not triggered by default.


Partial divestment of two service rigs 


Disposing of 50% stake in two service rigs. 

  • Ezion announced that it has entered into a sale and purchase agreement with Sea Explorer, its Malaysian business partner which took over Swissco’s 50% stake in the four JV units with Ezion, for the divestment of 50% stakes in Teras Conquest 8 and Teras Lyza.

Likely to be newbuild liftboats. 

  • We believe these are likely to be newbuild liftboats under construction given the low carrying value of S$625,000 in aggregate for the 50% interests.

Potential disposal gains. 

  • The cash consideration of US$10m will be subject to an adjustment of up to 120% (or another percentage to be agreed), based on a purchase price allocation to be carried by an accounting firm to be jointly appointed by Ezion and Sea Explorer. This implies potential disposal gains of up to US$9.375-11.375m (assuming 120% adjustment). 
  • In 2Q results, Ezion has booked in an estimated disposal gain of US$10.575 for this transaction.

Enhances cash flow. 

  • The divestment is expected to enhance Ezion’s strategic business relationship with Sea Explorer, improve the efficient use of its capital and cash flow while maintaining full operational control of the assets.




Pei Hwa HO CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-15
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade BUY 0.13 Down 0.620



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