3QFY15: Poor Performance Is Within Our Expectation
- Ezra’s poor performance is within our expectation. However, Ezra’s high gearing of 1.19x amid the current industry downturn and high cost structure make the situation challenging.
- A possible sale and leaseback of the Lewek Constellation would unlock US$200m in equity to bolster internal liquidity.
- We are awaiting a recovery in subsea job tenders.
- We tweak our FY15-17 forecasts by 11-20%.
- Maintain HOLD. Target price: S$0.176 (ex-all). Entry price: S$0.14.
RESULTS
Poor performance was within our expectation.
- Ezra reported a net loss of US$3.0m for 3QFY15. There was a realised loss of US$9.7m on derivative instructions and a doubtful debt write-off of US$3.0m. These were partially offset by a forex gain of US$5.4m. The net impact was a net loss of US$7.3m.
- Excluding this, Ezra would have posted a net profit of US$4.3m.
- Nonetheless, Ezra’s profitability is teetering around the breakeven mark.
Group revenue fell 3% yoy.
- Ezra saw a lower turnover on lower contributions from the subsea and offshore support vessel (OSV) segments. Group revenue decline of US$11.4m (-3% yoy) in 3QFY15 was due to a US$21.0m fall in subsea revenue while OSV revenue fell by US$16.1m.
- These lower revenues were offset by an increase in revenue of US$25.7m from the marine services segment under Triyards.
- Gross profit fell 30% yoy. This was due to current projects being in the early execution phases. As a result, there was lower offshore execution activities, resulting in a lower gross profit recognised.
- Furthermore, the roll-out of the vessel Lewek Constellation was delayed by two months, from March to May, affecting subsea profitability in 3QFY15.
- Subsea gross margin was weak, at 9.5-10.0% vs 14% a year ago.
- The OSV segment under EOL also posted weak earnings performance with gross profit down 36% yoy.
Triyards was the star.
- Triyards reported better results than its sister companies, posting a 13% higher gross profit of US$14.1m in 3QFY15, while maintaining gross margins at 22%.
- This also came on the back of a US$175m contract win which lifted its orderbook to US$520m, and provided earnings visibility through to FY17.
- With more contract wins in the pipeline, much of Ezra’s earnings upside will stem from this segment in the near term.
Cost cutting sees impact.
- Administrative expenses fell 13% yoy to US$39.5m in 3QFY15 from US$45.7m a year ago.
- Ezra said its subsea business was built for revenue of US$2b-3b p.a. The group is now right sizing it to US$1b-1.5b. As such, it can cut costs correspondingly to reflect the smaller subsea revenue target.
STOCK IMPACT
Management expects subsea job awards to resume from October onwards.
- Ezra’s current orderbook stands at US$1b while its tenderbook is at US$7.7b-8.6b. Job tenders were delayed by the oil price collapse in 4Q14.
- Based on the current tender activities, management expects contract awards to resume from October onwards.
Interest savings of US$5.5m.
- Based on our estimates, FY15 gearing will fall from 1.31x to 1.24x, declining to 1.11x in FY16, assuming non-conversion of its convertible bonds.
- We assume the convertible bonds are issued at an interest rate of 5%. This translates to interest savings of US$5.5m per year, assuming redemption of its S$150m, 8.75% perpetual notes which will step up to 11.75% after Sep 15.
- The interest savings achieved represents 12% of our FY15 net profit forecast.
A potential sale & leaseback for Lewek Constellation.
- We understand from shipbrokers that Ezra is exploring a possible sale and leaseback of the Lewek Constellation.
- Built at a cost of US$620m, this vessel is a state-of-the-art ultra-deepwater pipelay construction vessel, of which only two currently exist globally. This transaction could unlock about US$200m of equity and the repayment of some US$400m debt relating to the vessel.
- While this would strengthen Ezra’s balance sheet further, the large bareboat chartering cost of the vessel (partially offset by removal of depreciating and interest cost) would add to Ezra’s cost burden and eat into cash flow.
EARNINGS REVISION/RISK
Adjusting our earnings forecasts upward by 11-20%.
- We raise our net profit forecasts for FY15, FY16 and FY17 to US$45m, US$40m and US$42m from US$40m, US$36m and US$35m previously.
VALUATION/RECOMMENDATION
Maintain HOLD with revised ex-all target price of S$0.176.
- We revise our P/B valuation yardstick to 0.3x 2016F P/B from 0.5x 2016F previously given the marked deterioration of the subsea industry in the last quarter.
- This translates to a revised ex-all target price of S$0.176.
- Ezra’s 1-year forward P/B bottomed at 0.26x during the Great Recession in 2008/09 which saw the Brent oil price falling below US$40/bbl.
- The OSVowner segment bottomed at 1-year forward P/B of 0.5x during the crisis.
SHARE PRICE CATALYST
Negative headwinds.
- These include additional costs from the sale & leaseback of the Lewek Constellation and a potentially prolonged industry downturn.
(Nancy Wei, Foo Zhiwei)
Source: http://research.uobkayhian.com/
