RHB Securities 2015-08-31: Ezion Holdings - Priced For Worst-Case Scenario.


Priced For Worst-Case Scenario 

  • We valued Ezion from another angle – discounting cash flow to equity under three conservative scenarios, yielding valuations between SGD0.61 and SGD2.31 per share. The stock has priced in no contract extension, deep cuts in charter rates, and other bearish assumptions against current evidence to the contrary. 
  • Maintain BUY and SGD1.60 TP (130% upside) based on 9x blended FY15/16F P/E, with long-term upward revision potential. 

 Current share price imputes overly-conservative assumptions. 

  • At a 70% long-term utilisation rate, zero contract extension, asset disposals at a 20% discount to book value, and higher-than-actual charter and repair costs, Ezion’s cash flow to equity from the contracts in hand today and asset liquidation are worth SGD0.61 per share in our bear case, net of all debt. The stock has traded below this amidst market depression. 

 Recent re-contracts have indicated robust demand within the liftboat industry. 

  • This year, Ezion has re-contracted four out of the five expiring contracts at the same rates as before (or higher, in one case), in spite of the current oil market, indicating the robustness of liftboat demand. Our base-case assumes one 5-year contract extension, and a 10% discount during disposal, resulting in a SGD1.24 value per share. 

 Bull case is not truly bullish, but only what management is working towards. 

  • Our bull case does not assume any growth, merely imputing operational parameters that management is already targeting. These are: 
    1.  a 95% long-term utilisation rate, 
    2.  assets used till end-of-life, and 
    3.  actual operating and repair costs. 
  • This long-term value works out to SGD2.31/share. To be conservative, we assume zero cash flow from asset disposals and from the expected sale of the logistics business. 

 Management’s share buybacks spell confidence. 

  • Ezion repurchased 2.5m shares in the last two weeks, with directors adding another 1.5m, highlighting management’s confidence in the company’s long-term value. 

 Reward-risk ratio deeply in long-term investor’s favour. 

  • The 13.5% downside vs the 227.7% upside between our bear and bull cases yields a reward-risk ratio of 17x from today’s price. Long-term investors are likely to achieve above-market returns from this level. Key risks continue to be rig delivery delays and execution issues.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-31
BUY Maintain BUY 1.60 Same 1.60