DBS Vickers 2015-08-17: Ezion Holdings - 2Q15; Could have been better. Maintain BUY.

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EZION HOLDINGS LIMITED 5ME.SI

Could have been better 

• 2Q15 results below on unexpected vessel downtime and higher cost incurred for the Australian unit. 
• Trim FY15/16F earnings by 31/17%. 
• Look forward to better 2H on resumption of units currently under repair and upgrades, and new deliveries. 
• Reiterate BUY; TP lowered to S$1.00. 

Hit by unexpected loss of income and cost. 

• 2Q15 results disappointed, falling 36% y-o-y and 29% q-o-q to US$29m. This brings 1H15 PATMI to US$70m, making up only 34% of consensus estimate. 2Q15 would have seen sequential improvement on the back of three rig deliveries in the quarter. 
• However, performance was dragged down by loss of income for a large vessel taken off the fleet for repairs. This unit was contributing c.US$10m a quarter and this had offset the additional income stream from new deliveries. In addition, there were higher-than-expected expenses incurred from employing Australian crew for the newly commenced Australian time-charter unit. The unit was initially planned to be operated by an international crew which would have incurred lower costs. 
• Making things worse, the vessel suffered mechanical damage in its first month of operation. There were provisions made in 2Q, resulting in c. US$5m increase in COGS. Coupled with higher depreciation (+US$3m), gross margins fell by 11ppts q-o-q to 35%. 

Better 2H. 

• We have cut our FY15/16F earnings by 31/17% to account for the above mentioned unexpected events, and adjustment to delivery schedule. We expect some recovery in 3Q15 with full quarter contribution from the new deliveries in 2Q15, and a stronger 4Q15 with the resumption of six vessels that are currently off-hire for repairs and upgrades. 
• Potential upside could come from successful cost pass-through and claims for repair cost of the Australian unit. There have been no cancellations or rate reductions made thus far. 
• Nevertheless, customers are demanding for service rigs with higher performance and specs to save on costs. As such, Ezion plans to switch 7 service rigs in 2H to minimise capex requirements for vessel upgrades. 

Reiterate BUY; TP revised to S$1.00. 

• Ezion remains one of the more resilient O&G players. Our TP is lowered to S$1.00, still pegged at 8x FY15F PE, following the earnings revisions. We believe Ezion should re-rate closer to our TP as it delivers on earnings in the coming quarters. 
• Key downside risks would be the further plunge in oil prices, which would dampen O&G activities and sentiment.

HO Pei Hwa | http://www.dbsvickers.com/ DBS Securities 2015-08-17

BUY Maintain BUY 1.00 Down 1.50