Ezion Holdings - CIMB Research 2016-05-13: Hoping for oil prices to be sustained

Ezion Holdings - CIMB Research 2016-05-13: Hoping for oil prices to be sustained EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Hoping for oil prices to be sustained

  • 1Q16 NP of US$15.5m in line at 25% of our FY16 forecast but 17% of consensus’.
  • Revenue remained steady qoq at US$82m as three rigs started deployment, offset by two off-hires, bringing total rigs in operation to 17 units (18 units in 4Q15).
  • The benefits of slight recovery in oil prices YTD may trickle in by 2H16 (assuming it is sustained at current levels), supporting the E&P spending in shallow waters.
  • No change to our EPS forecasts and target price (S$0.63), still based on 0.55x P/BV, in line with its average ROE in FY16-17. Maintain Add.

Three in, two out

  • Revenue and gross margins (25%) were steady qoq. 62% EBITDA margin was below our 75% estimate on US$14.6m unrealised forex losses from S$ bonds, offset by US$13m gain of partial disposal of liftboat 6. 
  • Three liftboats were deployed in 1Q16 in West Africa and Middle East on 2-7 years charter, offset by two off-hired units (service rig 10 for Pemex and liftboat 24 Sunrise). Sunrise is being converted into a MOPU (Mobile Offshore Production Unit) in Singapore and slated for deployment in 2017.

Cutting losses in Mexico

  • Ezion terminated its contract with Pemex for service rig (SR) 10 due to prolonged outstanding receivables. Sister rig 14 may end in 2Q16 on similar terms. Construction work has halted for SR 15 in Gulf of Mexico yard. These three 100%-owned rigs may be moved to Singapore for MOPU conversion. The US$81m impairment in 4Q15 provided for these terminations. 
  • Three more 50%-owned (with Swissco) rigs bareboat chartered to Romanian operator GSP (end customer: Pemex) may face a similar fate in 2H16.

Partial divestments of rigs to share financing costs

  • Trade receivables worsened to 219 days from 184 days at end-2015. Management guided that collection will still be slow in the next two quarters. 
  • Net gearing remained at 1.1x. The partial divestment of liftboat 6 (cost: US$45m) to an Indonesian partner is Ezion’s mechanism to ease its balance sheet, in our view. 
  • We expect more divestment in 2016, including liftboat 4 (cost: US$45m) and the liftboats earmarked for wind farm installation in China. These units will still be consolidated as joint-operation entities.

Expect recovery in 2H16, if oil prices sustained at current levels

  • The small-cap Singapore based offshore support services companies unanimously concurred that if oil prices are sustained at current levels, a gradual recovery is likely from 2H16, especially in the shallow water market. 
  • Oil prices are low to prevent shale gas players bumping up production, yet sufficient to support shallow-water offshore E&P. 
  • Ezion targets to have 24/25 rigs up and in operation by end-16 but we conservatively expect only 14 units and more delays.

Maintain Add

  • We keep our estimates intact. 
  • Our target price is still based on 0.55x P/BV (ex. warrants conversion). 
  • We believe FY16 could be the floor for its earnings and expect a recovery in FY17 with delivery of new rigs and re-deployment of old rigs. Stronger oil price is the key catalyst for the stock.

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-05-13
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.63 Same 0.63