RHB Research 2015-07-02: Ezion Holdings - Maintain BUY and SGD2.10 TP (104% upside)

  • We took Ezion on a NDR last week in Kuala Lumpur, meeting 20 fund managers and analysts in a series of jam-packed meetings. 
  • Maintain BUY and SGD2.10 TP (104% upside). 
  • Investor interest was high, with many marvelling at the depressed valuations of Singapore’s oil & gas firms. 
  • Key concerns on charter contract terms and rate fears were well addressed, in our view. 
  • The stock remains unjustifiably low despite the lawsuit having been withdrawn. 

Strong investor interest. 

  • Over the short space of 1.5 days, Ezion’s management met with 20 fund managers and analysts in a series of back-to-back meetings on a non-deal roadshow (NDR) in Kuala Lumpur. 
  • Key takeaways are: 
    1. at least two of the five units in dry-dock in 1Q15 should be operational by 3Q15, 
    2. three of the four units for delivery in 2Q15 have joined the fleet and have begun charters, 
    3. it is still targeting some contract wins this year, and 
    4. expiring charters are expected to be renewed at the same rates. 

65% fleet growth to drive 45% earnings leap. 

  • Ezion is set to end FY15 with c.33 service rigs in the fleet, up from 20 at the start of the year. 
  • The full-year contributions of these additional units, all backed by long-term charters – plus the four service rigs to join the fleet next year – should drive the 45% earnings leap we envision in FY16. 

Consensus upgrades likely. 

  • The lower bound of consensus estimates imputes a significant discount in Ezion’s charter rates, which is a scenario we think is unlikely to materialise. 
  • Management has repeatedly clarified that charter rates have remained unchanged and that there are no renegotiations ongoing. 
  • We believe that this sets the stage for consensus upgrades in the latter half of this year. 

Unjustified depression. 

  • The depressive sentiment of the market is evident in Ezion trading below book value for a company delivering 18- 22% ROEs and generating rapidly-growing cash flows (P/CF is now 3- 4x). 
  • Our SGD2.10 TP, based on 10x blended FY15F/FY16F P/Es, implies an undemanding 7.45x FY16F P/E
  • We note that the stock is trading near 52-week lows, even though the lawsuit against the company has been withdrawn. 
  • The stock was trading at SGD1.20 before that. 
  • Key risks are liftboat delivery delays and negative market sentiment on Eurozone issues.

(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/