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Ezion Holdings - UOB Kay Hian 2016-03-02: 4Q15 Actively Seeking New Opportunities To Ride Out The O&G Storm

Ezion Holdings - UOB Kay Hian 2016-03-02: 4Q15: Actively Seeking New Opportunities To Ride Out The O&G Storm EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings (EZI SP) 4Q15: Actively Seeking New Opportunities To Ride Out The O&G Storm 

  • Loss for 4Q15 was as forewarned. Excluding provisions, 2015 net profit was in line with our expectation. Ezion actively seeks new opportunities to ride out the O&G storm. These include: 
    1. an impending strategic tie-up to better service liftboat demand in Asia, 
    2. its new windfarm business China, and 
    3. a new MOPU conversion business. 
  • We cut our 2016-17 net profit forecasts by 48% and 19% respectively. 
  • Our target price is unchanged at S$0.79. Maintain BUY. 


RESULTS 


• Loss for 4Q15, as forewarned. 

  • Ezion reported a net loss of US$64m for 4Q15, but a net profit of US$37m for 2015. This was as forewarned in its profit warning last week. 

• Adjusted 2015 net profit in line. 

  • The loss for 4Q15 was essentially due to asset impairments: a) US$81m of impairment losses on plant & equipment and provision for trade receivables (50:50), and b) Ezion’s share of AusGroup’s loss of A$69m (with a A$45m impairment), which we estimate at US$9m. 
  • Excluding the losses, Ezion’s 2015 net profit would have been US$128m, 4% below our forecast of US$134m and 14% above consensus of US$112m. 

• A bonus issue of up to 323.9m free warrants has been proposed, with an exercise price of S$0.50. 

  • The warrants will be allotted to shareholders on the basis of one warrant for every five shares held. 

• Lower gross margin for 4Q15 on initial mobilisation cost. 

  • Revenue for 4Q15 was US$84.8m, down 19% yoy (4Q14: US$104.6m) due to the absence of contribution from projects in Queensland, Australia. 
  • Gross profit fell 61.8% yoy from US$52.9m in 4Q14 to US$20.2m in 4Q15. 
  • Gross margin was 24% (4Q14: 51%) due to deployment cost of two additional service rigs on top of opex for non-operational service rigs. 
  • Deployment costs comprising initial mobilisation and crew costs, totalled US$6m. 


Key Takeaways From Analyst Briefing: 


• Asset impairments. 

  • Management has reviewed the valuation of Ezion’s fleet based on the discounted cash flows of each liftboat and service rig. It has taken into consideration units that are facing unemployment, customer requests for lower charter rates (even in cases where Ezion does not accede) and difficult trade receivables. 
  • Management believes Ezion has made sufficient asset impairments, assuming oil prices remain at current levels and do not see another collapse. 

• Charter rates. 

  • Existing charter contracts are still valid. However, following another round of oil price collapse in November, oil companies have made greater demands for charter rate cuts. 
  • To help customers tide through the difficult period, Ezion has conceded discounts on the understanding that charter rates will revert should oil price recover in the future. 

• A new strategic tie-up to meet Asia’s liftboat demand. 

  • While not forthcoming in details, management expects a strategic tie-up with a “large group” in the near future. The tie-up will enhance Ezion’s ability in servicing the demand for liftboats in Asia and puts it well ahead of any competition. 

• Update on China’s windfarm business. 

  • Ezion expects to deploy two service rigs in 2016 to its new windfarm business in China. Ezion is the only Asian company: 
    1. whose management has a proven track record in the installation of windfarm, and 
    2. with the relevant assets. 
  • European assets have proven to be unsuitable expensive windfarm assets for China. 
  • China has set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. With a capacity of 2.7GW as of end- 15, China has much catch-up to do. Ezion has tied up with two Chinese state-owned enterprises (one SOE regulation-related while the other is work-related) in its new windfarm business in China. 

• Diversifying to MOPU conversion. 

  • In recent years the offshore production systems sector (FPS - eg fixed platforms, FPSOs) has seen oil companies reduce charter contracts terms to as short as three years. This structural change has made large investments difficult and calls for cheaper solutions. 
  • Ezion sees opportunities in the conversion of jackup rigs to mobile offshore production units (MOPU) which are far more feasible and inexpensive oil producing systems for shallow-water oil production than conventional fixed production platforms. This led to Ezion’s acquisition of a 30% stake in Rotating Offshore Solutions (ROS) last year. 
  • ROS has an EPCIC division that provides one-stop solutions to clients to convert jack-ups rigs to MOPUs. 


STOCK IMPACT 


• Poor 4Q15 results discounted. 

  • Ezion is managing as effectively as it can in the current downturn of the oil & gas (O&G) industry while seeking opportunities elsewhere to better deploy its assets. 


EARNINGS REVISION/RISK 


• Cut 2016-17 net profit forecasts by 48% and 19% respectively. 

  • We cut our 2016-17 net profit forecasts in light of the spillover effects of unit switching going into 2016. 
  • We also lower our gross margin forecast to 35% for 2016 to reflect the lower dayrates, and raising it to 40% from 2017 onwards to reflect an improvement in the offshore market. 
  • Our 2018 net profit estimate is introduced at US$232m. 


VALUATION/RECOMMENDATION 


• Maintain BUY and target price of S$0.79. 

  • We roll forward our valuation, pricing Ezion at 0.6x 2017F P/B. Our P/B benchmark is premised on Brent oil at the US$50/bbl level. 
  • In our view, Ezion is faring relatively well amid the gloomy earnings outlook from the rest of its peers. 
  • Contracts remain mostly intact, and with Ezion swiftly manoeuvring to re-deploy its assets into new opportunities unaffected by the oil price downturn, earnings will improve alongside its decoupling from the O&G industry downturn. 
  • Current valuations are compelling for what is essentially a profitable company with decent net profit margin of 11%, double-digit ROE from 2017 onwards and annual operational cash flow of about US$200m. 


SHARE PRICE CATALYSTS 

  • A rebound in oil prices. 
  • Quarterly earnings recovery amid the O&G industry downturn.



Nancy Wei UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-02
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.79 Same 0.79


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