RHB Securities 2015-08-17 - Ezion Holdings - A Tough Year So Far. Maintain BUY.


A Tough Year So Far 

  • Ezion’s 2Q15 PATMI of USD29m missed estimates (a key reason being a cost overrun in Australia), but we highlight its strong operational cash flow (+88% YoY). 
  • Maintain BUY, with a lower SGD1.60 TP (121% upside, from SGD2.10) based on a 9x blended FY15F/16F P/E. 
  • A fourth contract expiring this year was renewed at the same rate, for 5+2 years, indicating strong liftboat demand. 
  • Our TP implies a 7x FY16F P/E and 1.3x P/BV. 

 Operational challenges in opening up new market in Australia. 

  • The Nora Sunrise (Unit #24) was the first liftboat ever introduced to Australia. Although it suffered a cost overrun due to local issues, which led to the need for additional repair expenses, it also succeeded in drawing interest – even from non-oil companies. We estimate the total excess costs at USD7m in 2Q15, part of which will spill into 3Q15. 

 Six units under repairs, upgrades, and dry dock inspection (RUDDI) will return to service by 4Q15. 

  • Management expects all six units to resume their charters by Sep-Dec 2015 (see Figure 2). The switch from pure costs to earnings contributions should have a positive operational leverage effect on Ezion’s earnings from 4Q15 onwards. 
  • On top of that, six new-build units will be delivered in 2H15 to bring its end-FY15 fleet size to 31 vessels, before growing to 37 vessels at end-FY16. 

 Short-term pain for long-term gain. 

  • In response to customer requests for higher-specification units or additional capex on current units, it is employing a strategy made possible by economies of scale – swapping units between customers to meet such requests, thereby lowering its overall incremental capex requirements. Seven units are affected, which may lead to utilisation gaps in 2Q15-3Q15. 
  • The upside is revenue visibility – two such contracts are for five years with two more optional years – which points to strong and continuous demand for liftboats. 

 Unwarranted discount. 

  • We switch to highly-conservative assumptions, pushing units under RUDDI out to 1Q16 deployment, and further taking a 10% cut on revenues for FY16F/FY17F in case of further issues. 
  • We cut our FY15F/FY16F earnings by 34/21%. Even so, we project it to deliver c.13-19% ROEs in FY15-17, and believe the 30-40% discount to BV is unwarranted. It is trading at 3x FY16F P/E and 2.5x operating cashflow. 
  • Key risks are execution problems and further delivery delays.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-17
BUY Maintain BUY 1.60 Down 2.10