Ezion Holdings - CIMB Research 2016-03-01: Buying time

Ezion Holdings - CIMB Research 2016-03-01: Buying time EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Buying time 

  • FY15 net profit of US$37m was below our and consensus’ expected profit of US$122m due to US$81m impairment charges and share of losses of Ausgroup. 
  • We expect Ezion to achieve positive FCF of US$110m in FY16 and c. US$60m in FY17 after delaying FY16-17 capex (for six rigs) by at least 12 months. 
  • Our EPS is cut by 55-60% for FY16-17 for delayed deliveries, lower margin rates. 
  • Our target price is lowered to S$0.63, now based on 0.55x FY16 P/BV (in line with its average ROE in CY16-17). Catalysts could come from stronger oil price 

■ Margin and rates under pressure 

  • 4Q15 revenue of US$85m was steady qoq but gross margin dropped from 29% in 3Q15 to 24% due to higher mobilisation costs incurred for three rigs. 
  • We believe the trend of absorbing mobilisation costs will continue as long as oil prices remain low. As a service operator, Ezion is likely to be squeezed. 
  • Day rates were cut by an average of 5-20% yoy. 

■ US$81m impairment, need to reassess by end-FY16 

  • The US$81m impairment comprised general provisions for trade receivables (50%) and asset impairment for 2-3 old service rigs (Pemex rigs), with implied 25% write-down in asset value (each rig costs US$55m). The provisions also took into account possible ‘change in usage’ of these rigs to mobile offshore production units (MOPU). 
  • Reassessment of further provisions will depend on oil prices and environment at endFY16. Our worst-case scenario is c.US$50m of provisions made for three Maersk rigs (US$70m-80m/each) if they remain unchartered. 

■ Assume 14 100%-owned units working in 2016 

  • We assume 14/19/24 working units in 2016/17/18, factoring in delays and non-renewal of contracts. 
  • We also apply generic cuts of 20% in FY17-18 day rates. As such, our revenue forecast is down 20% yoy in FY16 and EPS is cut 55-60% in FY16-17. 

■ Delaying capex to FY17-18; positive free cash flow (FCF) 

  • Ezion is pushing capex to 2017-18, delaying delivery of at least six rigs. We forecast it will spend US$100m/US$200m/US$160m in FY16/17/18. Net gearing stood at 1.1x at end-Dec 2015 and we expect this remain in FY16. 
  • Average trade receivable days (net of provision) was 184 days, with payment from IOCs at c.90 days and longer from NOC. 
  • We expect a worsening pattern of 220 days in FY16-18 but expect Ezion to post positive FCF of c.US$110m in FY16 c. US$60m in FY17 and c.US$138m in FY18. 

■ Warrants give hope 

  • Ezion proposed bonus warrant issue on the basis of one warrant for five shares, exercisable within four years at S$0.50/share. This represents 20% dilution of current share capital. 
  • We believe this is a fair deal, if investors take the view that oil price will recover in four years and are wiling to stomach weak sentiment over the next two years. 

■ Maintain Add but lower target price to S$0.63 

  • With our EPS cuts, our target price is lowered to S$0.63, now based on 0.55x FY16 P/BV (in line with its average ROE in CY16-17).

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-03-01
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.63 Down 0.95