CIMB Securities 2015-08-17: Ezion Holdings - 2Q15; Getting its house in order. Maintain ADD.


Getting its house in order 

  • Ezion has built up rapidly over the past 2-3 years, amassing an asset base of over US$2bn. However, this came the cost of its foundations, which may not be deep enough. 
  • We believe that 2Q and FY15 results reflect Ezion getting its house in order. At 36% of our FY15 forecast, Ezion’s 1H15 core net profit of US$70m (-23% yoy) was below our expectations and consensus. 
  • 2Q15 was marred by cost overruns and rejigging of its fleet, and we expect the effects to ripple through 3Q. We shave FY15-17 EPS by 10-29% as we factor in the earnings miss, tweak our fleet deployment assumptions and temper Australian contributions. 
  • We also lower our margin assumptions as Ezion shifts to operatorship (inherent executional issues). 
  • Maintain Add, with a lower target price (S$1.30), based on a justified 1.2x CY15 P/BV (instead of a blended valuation). Catalysts could come from stronger earnings and contract wins. 

2Q15 marred by cost overruns and rejigging of fleet 

  • The qoq drop in Ezion’s gross margin from 46.1% in 1Q to 34.9% in 2Q was mainly due to cost overruns from liftboat Sunrise (deployed in Australia). Unhinged by crewing, and then mechanical-related issues, we estimate that Sunrise incurred US$3m-5m losses in 2Q (due to repair provisions). 
  • The unit will be towed back to Batam, Indonesia for repairs in the coming week. It has contributed 1.5 months of revenue in 3Q and the unit could break even in the quarter if there are no further major repair expenses. The negative deviation also sprang from the interchanging of seven service rigs, which will continue throughout 3Q. This strategic manoeuvre is intended to improve deployment of assets in the longer term. The rejigging of fleet can be inferred from flat qoq revenue, which offset the deployment of three additional rigs (refer overleaf for fleet status). 
  • Margins were squeezed by the operating burden carried by the rigs, which were switched around (no revenue to offset depreciation charges,) as well as the associated costs of mobilisation and maintenance. 

Expect flat 3Q… 

  • but jump in FY16 when downtime rigs go online If there are no further major repair expenses for Sunrise and no contract cancellations, we expect c.4% qoq improvement in net profit for 3Q (US$30m). 
  • The improvement would come from full-quarter contributions from service rig #29 (50% JV with Swissco in the Middle East), liftboat #19 (deployed in Brunei) and a small contribution from one service rig added in 3Q. As yet, no additional rigs have been delivered in 3Q. 
  • However, these would be offset by the full-quarter’s downtime for rig #12 (deployed in Myanmar), possible maintenance for liftboat #3 (deployed in the Middle East) and continued effects of rejigging the fleet, which we believe will be more substantial vs. 2Q.

YEO Zhi Bin | http://research.itradecimb.com/ CIMB Securities 2015-08-17
ADD Maintain ADD 1.30 Down 1.55