Ezion Holdings - UOB Kay Hian 2015-11-13: 3Q15 ~ Earnings Weakness To Continue As Unit Swaps Spill Into 2016

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EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings (EZI SP) 3Q15: Earnings Weakness To Continue As Unit Swaps Spill Into 2016 

• 3Q15 net profit was US$30.3m, within expectations, as weaker earnings from unit switching extended into 3Q15 as guided. 
• More units became non-operational as additional units were pulled for maintenance. Ezion is exploring potential tie-up with industry players to mitigate the downturn. 
• Switching issues are expected to spill over into 2016 as more service rigs are now expected to remain non-operational by end-15. 
• We cut our 2015-17 net profit forecasts by 11%, 17% and 10% respectively. 
• Maintain BUY. Target price: S$1.01. 

RESULTS 

 Net profit down 38.4% yoy to US$30.3m. 

• Ezion reported 3Q15 net profit of US$30.3m, down 38.4% yoy from US$49.2m in 3Q14. 
• 9M15 net profit was 67% of our full-year forecast of US$150m. 
• 3Q15 earnings were within expectations as unit switching in 2Q15 was guided by management to spill over into 3Q15. 
• Gross margin weakness from unit switching was underpinned by further operational issues which saw additional units come off work during the quarter. The core operating weakness was offset by a 58% yoy increase in earnings from associates and jointly controlled entities, which rose from US$5.7m to US$9.0m. 
• POSH and Charisma Energy were highlighted as the main reasons for the higher contributions. 
• Excluding forex gain of US$7.5m, 3Q15 net profit would have been US$22.8m, weaker than 2Q15 net profit of US$29.0m. 

 3Q15 weak gross margin due to fresh operational issues and unit switching. 

• Gross margin weakened further from 35% in 2Q15 to 29% in 3Q15 owing to an increase in nonoperational service rigs, from 6 units to 8 units. The absence of revenue contribution from these units while their full cost was borne on cost of sales led to the margin decline. 
• The margin weakness is expected to reverse in the coming quarters as these units overcome operational hurdles and return to work. 

 Finance cost up 31% yoy to US$7.0m. 

• Finance cost rose 31% yoy from US$5.4m to US$7.0m on higher interest expense from funding of a newly delivered service rig. 

Key Takeaways From Analyst Briefing: 

 Potential tie-up with industry players to mitigate industry downturn. 

• Ezion highlighted it was in discussions with two industry players to diversify out of the sector. Without citing additional details, management said a tie-up is expected to help mitigate the negative impact of the downturn. 
• No firm timeline was provided but is likely to be revealed within the coming weeks. 

 8 units not operational in 3Q15. 

• As of end-3Q15, 18 out of 26 service rigs were operational. Average utilisation was 60% for the quarter, as two units were taken off work in late-August for maintenance. Ezion took delivery of one additional unit in 3Q15, which was deployed for work in Southeast Asia in September. 

 Unit switching to spill over into 2016. 

• Management is now guiding additional rigs to come off work as they are pulled from their contracts for maintenance and switching. 
• Fleet utilisation will be impacted beyond 4Q15 as Ezion now expects 21 out of 28 units to be operational by end-15 versus 29 out of 31 previously. It still expects all 37 units to be fully operational by end-16. Utilisation will therefore see a staggered recovery to full utilisation over the coming quarters. 

 Teras Sunrise mostly non-operational for 3Q15. 

• In 2Q15, we reported Teras Sunrise had suffered operational issues in Australia which required its return to a yard for repairs. The unit saw three weeks of revenue contribution in 3Q15 before sailing to Sembawang Shipyard for repairs where it currently remains. Ezion is currently in negotiations with the client on contractual issues before re-deploying it back for work. Details of 8 units that were non-operational: 
  1. Unit 1: Renewed for a job in West Africa but continues to suffer delays due to the political upheaval in Nigeria. Expected to return to work by end-4Q15. 
  2. Unit 7: Chartered for a new 3+2-year contract in Africa. The unit completed its special survey while undergoing longer-than-expected repairs at the African yard. Expected to return to work by end-4Q15. 
  3. Unit 8: Was on charter for a job in Europe. Switched out for maintenance. 
  4. Unit 9: Suffered an accident in Nov 14 and underwent repairs at Sembcorp Marine’s Singapore yard. Repairs have been longer than expected. Expected to return to work in end-4Q15. 
  5. Unit 11: Was on charter for a job in Europe. Switched out for maintenance. 
  6. Unit 12: Was working in Myanmar and suffered downtime owing to a switch. 
  7. Unit 13: Originally held for sale while on charter in China. The unit has been removed from held-for-sale as Ezion is now expecting to operate the vessel for the job instead of selling it to the contractor. 
  8. Unit 18: On charter for job in Caspian Sea. Remains non-operational due to longer-than-anticipated equipment loading by the client. The unit is expected to start work in beginning of Dec 15. 

STOCK IMPACT 

 Weakened earnings visibility due to switching. 

• The continued unit switching that started in 2Q15 is now expected to extend beyond previous guidance of 3Q15 and into 2016. Contracts remain mostly intact, with earnings recognition deferred into 2H16 and beyond. 

EARNINGS REVISION/RISK 

 Cut 2015-17 net profit forecasts by 11%, 17% and 10% respectively. 

• We cut our 2015 net profit forecast in light of the spillover effects of unit switching going into 2016. We cut 2016-17 forecasts on lower assumed gross margins of 41% and 45% respectively. 
• The lower gross margins reflect lower utilisation of 90-95% as we anticipate continued operational issues from the downturn to hinder a 100% utilisation. 

VALUATION/RECOMMENDATION 

 Maintain BUY and lower target price to S$1.01. 

• In our view, Ezion is faring relatively well amid the gloomy earnings outlook from the rest of its peers. 
• We tweak our target price from S$1.05 to S$1.01, based on 0.8x 2016F P/B (premised on Brent oil price at US$60/bbl). 

SHARE PRICE CATALYSTS 

• A rebound in oil prices. 
• Quarterly earnings recovery amid the O&G industry downturn.

Nancy Wei UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.01 Down 1.05