Ezion Holdings - CIMB Research 2015-11-12: Finding a floor to earnings

Ezion Holdings - CIMB Research 2015-11-12: Finding a floor to earnings EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Finding a floor to earnings 

  • 3Q15 results below expectations as two additional rigs were off-hire. 
  • Fleet count for 3Q15: 26 rigs delivered. 18 in operation; eight off-hire. 
  • Seeking strategic tie-ups to diversify away from oil & gas. 
  • Cut FY15-17 EPS by 18-37%. Maintain Add with lower target price, now based on 0.8x CY16 P/BV (prev. 1x CY15 P/BV). 

 3Q15: Qoq weakness as two additional rigs were off-hire 

  • At 15% of our full-year forecast, Ezion’s 3Q15 core net profit of US$22.9m (-51% yoy, - 21% qoq) was below our expectations and consensus. 9M formed 61% of our full-year target. The qoq weakness mainly stemmed from two service rigs (deployed in the North Sea) coming out of the fleet in 3Q, bringing the total number of non-operational rigs to eight. Due to operating leverage effect, 3Q15 gross margins dropped 5.9% pts to 29%. 

 Trade receivables days lengthen to 208 days (FY14: 126 days) 

  • Other contributing factors to the qoq drop in margins include the re-jigging of fleet plus crewing costs, as some of the rigs which were down are preparing to start work. Worth highlighting was the lengthening of trade receivables days to 208 days (FY14: 126 days). Trade receivables swelled to US$202m as at 3Q15 (FY14: US$160m) as customers are dragging payments. For example, industry sources cite that Mexican NOC, Pemex, is now requesting for six-month payment terms. 

 Net gearing of 1.1x as at end-3Q15 (FY14: 0.9x) 

  • Ezion’s net gearing inched up to 1.1x due to the combined effects of additional S$-bond raised and redemption of perpetual securities (decrease in total equity). YTD, Ezion incurred US$340m capex and we forecast c.US$250m for FY16-17. We project net gearing of 1x for FY15. 

 Fleet status for 3Q15: 26 rigs delivered, 18 in operation, 8 off-hire 

  • One more rig was delivered in 3Q (service rig #36), bringing the total number of rigs delivered to 26. 18 rigs were in operation, and averaged 83% utilisation in the quarter (2Q15: 96%). Including the eight rigs which are down, overall fleet utilisation was 60% (2Q15: 75%). We count five units that should be up for contract renewal while two units could undergo their five-year special survey in 2016. 

 Seeking strategic tie-ups to diversify away from oil & gas 

  • Management has shared that it is seeking strategic-tie ups and could deploy its service rigs for other industries (read: wind energy sector). Given the severity of the downturn, we laud the move. We think that a more pro-active strategy is needed vs. the common thinking of hankering down and waiting for the upturn to come. 

 Finding a floor to quarterly earnings: 2H16 to see improvement 

  • We think that investors would require a floor to quarterly earnings before re-visiting the stock. After our 18-37% EPS cuts for FY15-17 (factoring in drag from units which are down), we think that Ezion is not far off from that. We envision 4Q15 to be a slightly weaker quarter (US$22m net profit), but project 1Q16 to be incrementally better. We could see a meaningful improvement in 2H16 with more rig deliveries. 

 Maintain Add, lower target price to S$0.95 

  • With Ezion expected to achieve 12% ROE in FY17 (meeting its COE), a theoretical 1x P/BV could be justified. However, as we roll over our valuations to end-CY16, we also apply a 20% discount to its BV to account for receivables and impairment risks. Maintain Add, with positive earnings revisions as potential catalyst.

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-11-12
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.95 Down 1.30