Ezion Holdings - DBS Research 2016-03-02: Diversifying away from O&G

Ezion Holdings - DBS Research 2016-03-02: Diversifying away from O&G EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Diversifying away from O&G 

  • 4Q15 swung into losses with US$93m impairment charges and share of Ausgroup’s losses 
  • Trimmed FY16/17 earnings by 30-33%, after adjusting for delivery schedules and temporary rate reduction 
  • Windfarm venture taking off; diversifying from bleak O&G sector 
  • Proposed 1-for-5 bonus warrants issue 


Maintain BUY on Ezion with a TP of S$0.85

  • Maintain BUY on Ezion with a TP of S$0.85, based on 0.7x FY16 P/BV. We remain optimistic on Ezion’s ability to survive through this downturn with its solid management team, network and assets. 
  • Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts. 

4Q15 hit by asset impairments. 

  • Ezion reported a net loss of US$63.5m in 4Q15 due largely to asset impairments of US$81m for its own fleet and US$12m share of associate losses from Ausgroup. 
  • Core earnings were also weaker than expected with gross margins contracting 26.8ppt y-o-y and 5.1ppt q-o-q to 23.8%. 
  • We trim our FY16/17 estimates by 30- 33%, factoring in a bigger charter rate cut from 15-20% to 20-25%. 

Successful takeoff of windfarm plan. 

  • 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. 

Valuation: 

  • We value Ezion based on 0.7x FY16 P/BV, arriving at a target price of S$0.85. This implies a 60% upside potential. 


Key Risks to Our View: 


Rate reduction and contract terminations 

  • 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. 
  • Competition might be keener ahead with more new entrants attracted to the growing liftboat market.



Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-03-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.85 Same 0.85


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