May not be the trough yet
- 3QFY8/15 net loss of US$3m was disappointing as we had expected US$12m profit and consensus was going for US$18m. This brings 9M15 to US$2.5m net loss.
- Offshore and subsea operations were blighted by the challenging business environment. This was made worse by a loss in derivative instruments and provision for doubtful debts.
- Without the latter, Ezra would have made a net profit of US$4m.
- Weak utilisation, OSV rate pressure and lower margin on new subsea contracts point to a grim outlook.
- We slash our EPS by 77-86% to reflect weaker margins and the recent rights issue.
- Ezra remains a Reduce, with a lower target price (from S$0.38 to S$0.12), still pegged to 0.3x P/BV CY15.
Doom and gloom
- 2H is typically seasonally stronger with better weather but not this time. Subsea’s (c. 70% of revenue) utilisation fell from 87% in 3Q14 to 78% in 3Q15 with the delay of Lewek Constellation from Mar to May 15.
- Other subsea projects executed were largely engineering stage (lower margin). Subsea gross margin dipped to 9.5% in 3Q15 vs. 15% in 3Q14.
- New contracts are being closed at 8-10% gross margins given the current challenging environment.
- Offshore chartering (13% of revenue) faced stronger headwinds as utilisation of PSVs and smaller AHTS was only 55-60%.
- The only bright spark was the larger AHTS (above 10k BHP) which were at 85-95% utilisation.
- Rates for new charters were reduced by 15-30%.
- Offshore gross margin was 10%. We believe losses are likely ahead if utilisation does not improve.
Then and now
- Management guided for “muted” FY16 earnings on a challenging environment.
- Relative to the GFC, Ezra is worse off with the inclusion of lower-margin subsea business.
- The decline in global charter rates since then and heavy financing costs have also caused Ezra’s margin to plunge from the historical c.30%.
Read-through to other small/mid-caps
- Pacific Radiance’s chartering margin could face a similar operating leverage effect with weaker utilisation and day rate pressure. We are also cautious about its anaemic subsea utilisation.
- Ezion is more resilient as service rigs/liftboats are less commoditised, backed by longer-term charter. Renewal risk is also low for Ezion as four out of five rigs have been re-contracted at similar/higher rates.
- Swissco’s earnings will be resilient if it is able to renew the three Ensco rigs.
(LIM Siew Khee)
Source: http://research.itradecimb.com/
