Ezra Holdings - UOB Kay Hian 2016-01-15: 1QFY16 ~ High Earnings Risk Despite All-Time Low P/B

Ezra Holdings - UOB Kay Hian 2016-01-15: 1QFY16 ~ High Earnings Risk Despite All-Time Low P/B EZRA HOLDINGS LIMITED 5DN.SI 

Ezra Holdings (EZRA SP) 1QFY16: High Earnings Risk Despite All-Time Low P/B 

  • An extremely challenging outlook for the O&G industry in view of a fresh round of oil price declines. OSV dayrates have fallen steeply while subsea awards are being delayed as oil companies re-evaluate ways to optimise costs. 
  • Ezra carries a high earnings risk despite its all-time low P/B. 
  • Downgrade to HOLD with a lower target price of S$0.12. Entry price: S$0.06 and below. 


 Net profit loss of US$55.4m. 

  • Ezra reported a net loss of US$55.4m, split into US$18.7m loss for continuing operations (Marine Services, Offshore Support and Production Services) and US$36.7m loss for discontinued operations (100% of EMAS-AMC). 
  • Included in 1QFY16 were several one-offs - a US$13.9m loss from settlement of its hedge position on the MTNs redeemed in 2015, and restructuring charges in its administrative expenses. Excluding these, the continuing operations may have been profitable. 
  • Traditionally, 1Q of any financial year is seasonally the weakest due to the monsoon period. 

 Positive operating cashflow, but free cashflow remains negative. 

  • Operating cashflow swung from negative US$30.9m to positive US$12.5m, primarily due to a rise in payables and a decrease in inventory. However, free cashflow was negative as Ezra continued to face significant cash depletion on the redemption of its bank loans and notes payable. 


 OSV market has become extremely challenging. 

  • Management has said the offshore market remains very challenging. While the OSV tender market shows some bright spots, - with requirements for a total of 40 vessels in W Africa - competition is high with dayrates under pressure. In some cases, dayrates have fallen to 2002-03 levels of US$0.80/bhp from a market high of US$1.50-2.00/bhp three years ago. Margins are under pressure, with Ezra re-jigging its expenses to stem this pressure. To compete more effectively to secure vessel utilisation, Ezra has re-worked its loans with the banks. Vessel utilisation is of utmost importance, as the negative impact of idle vessels is greater than that of lower dayrates. We expect continued poor performance from the OSV division. 

 Subsea market still awaits tender awards. 

  • Although there are sizeable subsea tenders, contractors appear to be holding back on awards and are re-evaluating ways to optimise costs. Ezra’s current subsea orderbook stands at US$600m, and is awaiting the award of US$3bn of tenders from clients in the Middle East and West Africa. The outcome of its West Africa tender will be known by February. 
  • We expect further losses from the subsea business, based on a near trebling of losses in 1QFY16 and a continued delay in subsea awards vis-à-vis another round oil price rout. 
  • Ezra will report its subsea business as “discontinued operations” up till 2QFY16, after which - upon completion of its 50:50 JV with Chiyoda by 1QCY16 - the subsea business will be treated as an associate. 

 Marine services floating the boat. 

  • The division, predominantly made up of Triyards Holdings, is expected to support Ezra’s earnings for FY16. Triyards is expected to post strong earnings on the back of its record US$564m shipyard orderbook. 

 Weaker quarters ahead for Ezra. 

  • Historically, the OSV and Subsea businesses make up more than two-thirds of Ezra’s operating profit. 
  • With two of its three businesses posting weaker earnings or larger losses, earnings are likely to be dismal for the coming quarters. Any earnings uplift heavily depends on the macro oil & gas environment which we do not see improving till at least after 4QFY16. 


 Cutting FY16 forecast to a loss. 

  • We cut our earnings forecast to a loss of US$20m for FY16, as we now expect losses from the subsea unit to drag down earnings. 
  • We similarly cut our earnings forecasts for FY17 and FY18 by 70-80% to US$13m and US$15m respectively. 
  • Our earnings forecasts represent the recurrent earnings from continuing operations, and we have thus adjusted for the subsequent completion of the EMAS-AMC-Chiyoda JV, after which the subsea business will be treated as an associate. 


 Downgrade to HOLD with our target price cut to S$0.12. 

  • We revise our FY16F P/B benchmark to 0.25x. 
  • All our target prices in our oilfield services universe have been cut, following a revision of our longer-term Brent crude oil price assumption to US$50/bbl from US$60/bbl previously. 


  • Subsea contract awards. 
  • Oil price.

Nancy Wei UOB Kay Hian | Foo ZhiWei UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-15
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