Ezion Holdings - RHB Invest 2016-03-02: Taking It Slow

Ezion Holdings - RHB Invest 2016-03-02: Taking It Slow  EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Taking It Slow 

  • Ezion’s worst quarter is now behind it. Going forward, the company has delayed the delivery of six service rigs, which we forecast will allow it to hit c.USD150m of FCF for this year, and its gearing level should begin falling from this point. 
  • While the slower deliveries necessarily crimp earnings growth, the stock has fallen so far that even on a 39% lower earnings forecast this year, it trades at 4.3x FY16F P/E. 
  • Maintain BUY, with a SGD1.06 TP (from SGD1.40, 108% upside). 

“Temporary relief” in rates. 

  • Ezion has struck a compromise with its clients, offering “temporary relief” in charter rates but is not accepting offers of lower rates for longer tenures. 
  • Management has confirmed that if oil prices stabilise at above USD30/barrel (bbl) for Brent, no further impairments will be necessary. 

Delays six service rigs and will be FCF-positive from this year. 

  • The new delivery schedule is 2/5/2 units for FY16-18F, with a capex guidance of USD100m/200m/160m respectively. 
  • The 1-year average delays prompt us to slash earnings by 39%/33% for this year and the next. 
  • The silver lining is that given its USD209m of operating cash flow last year – and with utilisation rates anticipated to improve going forward – it should be strongly-FCF positive (c.USD150m) from this year, thereby bringing net gearing down. 

New business plan for its service rigs. 

  • Ezion will broaden its liftboats’ service offerings to wind farm installation jobs and mobile offshore production units. It will also explore tie-ups to help oil majors reduce costs. 1-for-5 free warrants. 
  • In lieu of the usual 0.1 US cent DPS, it will be giving a free warrant for every five shares owned, exercisable within four years at a strike price of SGD0.50. If all these warrants are exercised, we calculate that its gearing would fall to 82.0% from 90.5% in FY16. 

Survival not in question. 

  • Ezion’s ability to survive this downturn is, in our opinion, not in question with its core EBITDA interest coverage at 10.3x. Its current valuations are cheap in terms of almost all metrics. 
  • Our lower TP is based on 9x FY16F P/E, equivalent to 0.87x FY16F P/BV. 
  • Key risks to our estimates are: 
    1. a lower utilisation of service rigs due to operational issues, 
    2. customer demands for lower charter rates, and 
    3. a prolonged low oil price environment.

Lee Yue Jer CFA RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.06 Down 1.40