Ezion Holdings - OCBC Investment 2016-02-22: Not Immune To Industry Fallout

Ezion Holdings - OCBC Investment 2016-02-22: Not Immune To Industry Fallout EZION HOLDINGS LIMITED 5ME.SI 


  • Industry outlook grows dimmer 
  • Rising risk of impairments 
  • Switch to P/B valuation 

Earnings have been relatively better but how long can it last? 

  • As oil prices continue to stay low with the reluctance of major oil producing countries to cut production, many offshore & marine companies have been hit hard with minimal new orders and a smaller load of work that have resulted in losses in the past few quarters. 
  • Against this backdrop, Ezion Holdings has been reporting relatively better earnings compared to its peers, at US$41m for 1Q15, US$29m for 2Q15, and US$30m for 3Q15. 
  • Looking ahead, however, the outlook for the company will be increasingly dim should oil prices stay low or fall even further. 

Little can be done if customers are increasingly cash-strapped 

  • The group has been faring relatively better than its peers so far because its liftboats and service rigs, which mainly service ongoing production work, are deemed as a cost effective solution for the industry which is still looking to cut back on costs. 
  • The oil industry is aware that sustained delays or neglect in maintenance work will only impact future production, and has been most unwilling to cut back on this segment. 
  • Still, there are increasingly more cash-strapped companies in the oil and gas industry, and slow payments from customers could be an increasing risk. This could lead to impairment of receivables, such as what we saw from Dyna-Mac Holdings as well as our local rigbuilders. 

Not immune to industry fallout; downgrade to HOLD 

  • Besides this, we also saw several companies in the sector writing down their assets due to lower unit values. 
  • We do not exclude this possibility for the group, as oil prices have driven asset values down across the board. 
  • Although Ezion has been delivering relatively healthy quarterly results, we prefer to take the more prudent approach of valuing the company using P/B instead of our earlier P/E valuation, as we believe that earnings visibility could be increasingly dim. 
  • Taking into account the industry’s low valuations and the possibility of impairments as mentioned earlier, we value the group using 0.4x FY16F P/B, resulting in a lower fair value estimate of S$0.56. 
  • Downgrade to HOLD.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-02-22
OCBC Securities SGX Stock Analyst Report HOLD Downgrade BUY 0.56 Down 0.90