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

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.

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.

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.

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.

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.

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

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