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

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 

Another weak quarter. 

  • 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. 

US$1m for the Australian liftboat. 

  • 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. 

Key takeaways from briefing: 

  1. 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.; 
  2. 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; 
  3. As such, we could expect sequential improvement in the coming quarter; 
  4. The switching of units is still ongoing in an effort to minimise capex outlay for vessel upgrades. 

Reiterate BUY; TP S$1.00: 

  • 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
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