- 3QFY15 showed a core USD1.2m loss, which was a significant improvement from 2QFY15’s USD11.6m loss.
- Maintain TRADING BUY with a new SGD0.25 TP (56% upside).
- We believe the stock has priced in solvency concerns, although such risks have fallen drastically with the rights issue.
- The Lewek Constellation’s sale-and-leaseback appears to be the least dilutive funding option to repay the perpetuals.
- Ezra has an USD2.0bn/USD8.5bn orderbook/tenderbook.
Cash flow improves.
- Ezra’s 3QFY15 (Aug) cash from operations was a strong USD77.3m, bringing 9MFY15 cash generated to USD104.5m. Management has been successful in reducing the company’s cash conversion cycle to c.22 days in FY15 from 62 days in FY14.
- While core operations face continuing headwinds, leading to muted profitability at the accounting level, we see Ezra embarking on a deleveraging phase as capex falls to replacement levels, with management focusing on improving free cash flow (FCF) generation.
Sale and leaseback (SLB) of Lewek Constellation the best option for shareholders.
- We see the likely SLB of Ezra’s flagship vessel reducing debt by c.USD400m (vs current total of USD1.8bn), bringing net gearing down to c.97% ex-rights and to c.76% in FY16F post-SLB, from 119% today.
- This funding option to repay the USD120m perpetuals, while negative for operating margins, is non-dilutive vs the proposed issue of convertible bonds, and is also preferable to allowing the perpetuals to step up to a c.13% interest level.
Bond market has priced in improvements, but equity market has not.
- Ezra’s bond yields have fallen, indicating its strengthening financial position and reduced solvency risks post-rights.
- The equity market does not reflect this improvement, with the stock continuing to trade at a stubborn 0.3x ex-rights P/BV.
Adjusting TP to SGD0.25 (from SGD0.34) for rights.
- Adjusting for a larger-than-expected rights ratio, our TP falls to SGD0.25.
- The SOP implies 0.45x P/BV, with key valuation components implying 0.4x/0.6x P/BVs for the subsea/offshore vessels divisions, and 1x P/BV for Triyards (ETL SP, BUY, TP: SGD0.84).
- Maintain TRADING BUY.
Key risks to our forecasts.
- These include order win rates in the coming quarters and margin pressures from a challenging operating environment.
(Lee Yue Jer, CFA)
Source: http://www.rhbgroup.com/
