Ezion Holdings - CIMB Research 2015-10-30: Liftboats to stay afloat despite the oil tumult

Ezion Holdings - CIMB Research 2015-10-30: Liftboats to stay afloat despite the oil tumult EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Liftboats to stay afloat despite the oil tumult 

  • Oil companies to focus on production; and liftboats best suited to their needs. 
  • Ezion is combating rate cuts and cancellations but at the price of lower ROEs. Expect weaker 3Q15 but stronger 2016 with units returning plus newbuild deliveries 
  • Delivery schedule ensures earnings growth till 2017. Capex-cycle to end by 2016. 

Reiterating the liftboat story 

  • We hosted Ezion CEO Chew Thiam Keng on a 2-day NDR in the UK. Management said that demand for liftboats is strong, especially in the underpenetrated SEA market. Conceptualised in the Gulf of Mexico c.30 years ago, liftboats are a more reliable, safer and productive way to service shallow-water oil platforms vs. workboats/barges. Ezion is the first to successfully adapt and introduce liftboats to SEA NOCs. 

Liftboats to stay afloat in the oil tumult 

  • Given the oil tumult, management opines that oil companies are more likely to focus on enhancing production, rather than exploration and development activities. Hence, liftboats are best suited to meeting their needs. More importantly, liftboats are exposed to oil companies’ opex, rather than capex which have suffered the deepest cuts. 

Not entirely a bed of roses: similar rates but lower returns 

  • This is not to say that Ezion is not experiencing the rate cuts and contract cancellations afflicting the industry. Although it has renewed four out of the five contracts due to expire in 2015 at similar rates, some of the renewals have come at a cost as some units required upgrading. This means higher capex, earnings vacuum in the interim and lower return on assets. Plus, customers are paying more slowly. 
  • We estimate that another five contracts are up for renewal in 2016 and that one liftboat would be up for its 5-year special survey. 

Competition in dribs & drabs 

  • Given the attractive economics of liftboats (reflected by its best-in-class ratios), investors asked about new entrants. Management sees competition appearing in dribs and drabs. It is skeptical as to whether some of the competition truly understands the requirements for a liftboat to operate in Southeast Asia. 
  • Ezion also believes that its status as a qualified operator for the oil companies helps to separate the wheat from the chaff. To enhance operational and training regimes, the group has invested in a liftboat simulation training centre. 
  • Ezion sees distressed opportunities and strategic tie-ups on the horizon, given that a number of speculative units are being built in China. 

Expect a weaker 3Q15; look to a much stronger 2016 

  • With six of the 25 delivered service rigs still down (status-quo with 2Q), and two additional units in the North Sea potentially out this quarter, we forecast Ezion to post US$27m in earnings for 3Q15, down 6% qoq (2Q15: US$29m; 3Q14: US$49m). 
  • We are anticipating a much stronger 2016 as management expects the six units which are down, to be back by the end of the year. Another four new deliveries are expected by end-2015, taking the fleet count to 29 units. 
  • Ezion expects to take delivery of another eight units in 2016, taking the fleet count to 37 units, which also spells the end of its capex cycle. This also means that earnings growth is ensured until 2017. For the new deliveries, Ezion expects to incur US$150m in capex for 2H15; and US$250m for 2016. Our modeling assumptions differ due to timing differences. 

Contract coverage provides best-in-class ratios 

  • Ultimately, the liftboat story is substantiated by Ezion’s best-in-class ratios. Secured by 3-5 year contracts, earnings are relatively resilient while margins (EBIT margin > 40%) and ROEs (mid-teens) are among the best in the industry. 
  • Stress-testing Ezion, we found that its earnings and credit metrics are robust. The company does not face refinancing pressures in this tough operating environment as its notes are only payable from 2018 onwards. 
  • Despite being projected to generate ROEs near the mid-teens, Ezion is trading at 0.6x P/BV. This implies that the market has not only discounted incoming units, but has also priced in some contract cancellations, which we deem to be too pessimistic. Our justified 1.2x CY15 P/BV-based target price is intact. Maintain Add. TP S$1.30.

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-10-29
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