Ezion Holdings - DBS Research 2015-11-13: Earnings bottoming out

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Earnings bottoming out

3Q15 recurring PATMI below due to vessel downtime and repair cost
Trim FY15/16 PATMI by 11/12%, to reflect adjustments in delivery schedule
Expect earnings to bottom out with resumption of vessels currently under repair and upgrades, and new deliveries
Reiterate BUY; TP S$1.00

Ezion’s headline PATMI saw 4% q-o-q increase to US$30m, aided by a US$7m forex gain.
Gross profit however dipped 20% q-o-q to US$25m on the back of a 4% revenue decline and 5.9-ppt gross margin contraction to 29%.
Key culprits were the additional two North Sea units that were removed from the operating fleet for repairs and an additional repair cost of approx.

This brings 9M15 PATMI to US$100m, making up only 67% of our/consensus estimates.
We have cut our FY15/16 profit forecasts by 11/12% to largely reflect the changes in delivery schedule.
Net gearing rose from 0.9x to 1.1x as of end-Sept owing to the redemption of US$100m PERPs in the quarter.

Management cautions challenging outlook of O&G sector in the near term. While Ezion’s service rigs are cost-efficient solutions supporting the repair and maintenance space, cost reduction pressure from customers is mounting in the form of free upgrades, etc.;
Ezion took delivery of one rig in 3Q15 and will add another two units by end of 4Q15. In addition, three out of six vessels previously taken off for repair/upgrades will resume operations. Overall, operating fleet will be lifted from 18 rigs currently to 21 rigs (out of 28 delivered rigs) by end of 4Q15;
As such, we could expect sequential improvement in the coming quarter;
The switching of units is still ongoing in an effort to minimise capex outlay for vessel upgrades.

We still like Ezion for its market leadership in the rising service rig market, undemanding valuation at 6x FY15 PE and 0.5x P/BV despite 9% ROE, and bottoming-out earnings which should propel its share price ahead.
Our TP is unchanged at S$1.00 pegged at 0.8x P/BV.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2015-11-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.00 Same 1.00