EZRA HOLDINGS LIMITED
5DN.SI
Ezra Holdings (EZRA SP) - 2QFY16: Another Season Of Loss Provisions
- Ezra reported a net loss of US$250m for 2QFY16 with a total loss provision of US$207m.
- The operating environment is very challenging with OSV utilisation falling to 51% in 2QFY16 and subsea backlog having dwindled to US$400m.
- However, Ezra is hopeful of winning a huge contract in the Middle East in the near future, which should restore its subsea backlog.
- Maintain HOLD but reduce target price to S$0.09. Entry price: S$0.06 and below.
RESULTS
Another season of loss provisions.
- Ezra reported a net loss of US$250m for 2QFY16, split into US$220m loss from continuing operations (marine services, offshore support and production services) and US$29.8m loss from discontinued operations (100% of EMAS-AMC).
- The divestment of a 50% stake in EMAS-Chiyoda (formerly EMAS-AMC) was completed on 31 Mar 16.
2QFY16 was another season of loss provisions.
- Ezra made a total loss provision of US$207m, which included:
- US$18.1m loss from disposal of assets,
- US$60.5m impairment loss on fixed assets (PSVs and one AHTS),
- impairment loss of US$38.3m from investment in JV,
- US$18.9m bad debt write-off,
- US$48.6m bad debt provision and
- an estimated US$38m share of losses from associate Perisai’s impairment.
- Gross profit declined from US$22.8m in 2QFY15 to a gross loss of US$0.2m in 2QFY16, primarily due to weakness in the OSV business.
OSV is very challenging.
- EMAS Offshore’s (Ezra’s OSV unit) utilisation rate for 2QFY16 was 51% (1HFY16: 59%, FY15: 75%, FY14: 84%). However, Ezra said its OSV utilisation has since recovered to 70+%.
- Overall weakness in the OSV industry, especially the smaller PSV and AHTS segments.
- Ezra will continue to focus on established regions with more resilient demand, eg West Africa, where the group has local presence.
- Global operational footprint with vessels currently working in Asia-Pacific (78%) and West Africa (22%).
STOCK IMPACT
Reeling from second oil price fall.
- The second oil price fall in Nov 15 has sent the oil & gas industry into a deeper downturn. Contract awards have been pushed out further. The industry needs stability in oil prices to plan and resume capex spending.
- In the meantime, oil service companies are doing their best to stay afloat. This includes negotiations with bankers over loan covenant waivers, shoring up fleet utilisation, cutting cost and raising productivity.
- Basically, firing on all cylinders to sustain until a sector recovery.
Low subsea backlog; awaiting US$1.5b contract award.
- The 50:50 JV with Chiyoda taking a 50% stake in EMAS Chiyoda Subsea (ECS) was completed on 31 Mar 16. Subsea backlog is currently at US$400m, and will last for the next 12 months.
- While the backlog is low for now, news points to ECS being a frontrunner for the award of the US$1.5b Hasbah project.
- Management is positive on winning the award, which is expected to be announced by Aramco within the next few weeks. ECS had jointly bidded for the project with Larsen & Toubro.
Net gearing up to 1.1x for 1HFY16, but expected to decline.
- Ezra’s net gearing rose to 1.1x for 1HFY16 due to the decline in equity and increased working capital loans. However, we expect this to decline to 1.0x by end-FY16, without adjusting for the balance sheet impact from the JV completion.
- Balance sheet as of end-1HFY16 has not been adjusted for the JV as completion was 31 Mar 16. Net gearing is expected to come down significantly (admittedly off-balance sheet) from current 1.1x as an estimated US$0.6b in debt from EMAS-AMC’s is removed from current total debt of US$1.3b.
EARNINGS REVISION/RISK
FY16 loss widened to US$291m from US$20m.
- We slash our FY16 loss forecast further to account for the impairments and provision recorded for the quarter.
- Our FY16 estimated loss widens to US$291m from US$20m for FY16, while our FY17-Y18 earnings are tweaked slightly by 1-3% to US$13.5m and US$15.3m respectively.
- Our estimates represent earnings from continuing operations, and we have adjusted our earnings from the joint venture for the completion of the EMAS-AMC-Chiyoda JV.
VALUATION/RECOMMENDATION
- Maintain HOLD but cut our target price to S$0.09, based on 0.25x 1-year forward P/B.
- Current share price implies a 14% downside. Entry price is S$0.06 and below.
SHARE PRICE CATALYSTS
- Subsea contract awards.
- Oil price.
Nancy Wei
UOB Kay Hian
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Foo ZhiWei
UOB Kay Hian
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http://research.uobkayhian.com/
2016-04-18
UOB Kay Hian
SGX Stock
Analyst Report
0.09
Down
0.12
