RHB Securities 2015-08-28: Ezra Holdings - Subsea Sale Crystallises Value.

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EZRA HOLDINGS LIMITED 5DN.SI

Subsea Sale Crystallises Value 

• Ezra has sold 50% of its subsea business (AMC) to Chiyoda Corp at an adjusted enterprise value (EV) of USD890m. It will receive USD180m in cash for the 50% stake in the equity of AMC, equivalent to 78% of its current market cap. 
• Maintain TRADING BUY with a higher SGD0.36 TP (from SGD0.25, +216% upside), still imputing a 20% discount to the sale-EV for conservatism. 
• The stock price currently values Ezra’s other listed subsidiaries below zero. 

 Crystallising value with sale at effectively book value. 

• Ezra will book a small USD2m gain on the sale, which stands in stark contrast with the group’s current market valuation, which is at c.0.2x P/BV. Note that our adjusted sale-EV is USD890m (USD360m equity plus USD530m of thirdparty debt. We stripped out the USD360m intra-company loan which Ezra includes as part of the deal value.) 

 De-risking operations and deleveraging the company. 

• This sale has double benefits in operational and financial terms. Ezra’s operational risks are now shared with Chiyoda Corp (6366 JP, NR) in equal parts. Financially, Chiyoda now shares half the working capital requirements of the USD2bn of subsea projects in Ezra’s orderbook, and the USD180m cash inflow will help reduce the group’s net gearing to c.80%. 
• We also expect its EBITDA-interest coverage ratio to improve next year. 

 Cash inflow is 78% of current market cap. 

• This cash inflow is worth a full 78% of its market cap, and Ezra still owns the other 50% of AMC. It also owns 75% of EOL (EMAS SP, NR) and 61% of Triyards (ETL SP, BUY, TP: SGD0.84). 
• The current market price values both subsidiaries below zero . 

 Still maintaining conservatism in valuation. 

• This successful sale vindicates our belief that the market has been overly pessimistic on Ezra, sending it to deep-value territory. We raise our TP to SGD0.36, incorporating a 20% discount to the sale-EV of AMC, c.0.6x P/BV for EOL and 1x P/BV for Triyards. Without the 20% discount, our TP would be SGD0.45. 
• We also see long-term upgrade potential in Ezra from operational outperformance at Triyards, which could lead to a re-rating above our highly-conservative 1x P/BV. Key risks continue to be its subsea project execution and vessel utilisation rates.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-28

TRADING BUY Maintain TRADING BUY 0.36 Up 0.25