Ezion Holdings - DBS Research 2016-01-14: Liftboats to the rescue

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Liftboats to the rescue

Secured agreement to jointly market two newbuild liftboats to be owned by partner for offshore windfarm market.
Plunging oil prices add pressure for rate reduction; trim FY16-17 PATMI forecasts by 27-31%.
Reiterate BUY; TP S$1.00.

We reiterate our BUY call on Ezion, TP is unchanged at S$1.00, pegged to 0.8x P/BV.
Rerating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 1H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts, while minimising rate reduction pressure from O&G customers.
We have trimmed our FY16-17 PATMI by 28-32%, after imputing a higher 15% discount (5% previously) this year and a further 5% next year on average charter rates.

China has set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed.
A liftboat could facilitate installation of 200MW offshore wind capacity a year.
Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China.
Ezion has signed a MOU with one of the top five IPPs in China to speed up the installation of offshore windfarms using liftboats.

Ezion has a prudent business model. Fleet expansion is backed by long-term charters of 3-5 years.
Demand is also relatively more resilient as service rigs are exposed to the production phase in the shallow water segment. Only 10-20% of Ezion’s fleet, largely in Mexico, are deployed for developmental drilling which see relatively higher risks of cancellations amid low oil prices.

We value Ezion based on 0.8x FY15 P/BV, arriving at a target price of S$1.00. This implies an 81% upside potential.

We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 3%. We have prudently assumed a 15% rate reduction in FY16 and a further 5% in FY17.
Five service rigs are due for charter renewals in FY16. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region, though there is no such indication from PEMEX thus far.
Competition might be keener ahead with more new entrants attracted to the growing liftboat market.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-01-14

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