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Ezion Holdings - DBS Research 2016-05-13: Good entry point

Ezion Holdings - DBS Research 2016-05-13: Good entry point EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Good entry point

  • 1Q16 results broadly in line; forex loss was offset by disposal gain
  • Trimmed FY16-17 earnings forecasts by 3-5% after adjusting the delivery schedule
  • Expect sequential improvement in 2H16
  • Reiterate BUY; TP S$0.85



Maintain BUY on Ezion with a TP of S$0.85, based on 0.7x FY16 P/BV. 

  • Given the recent pullback to near YTD low, we believe it’s time to accumulate Ezion, given the decent 1Q16 performance and improving prospects. 
  • 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 in 2H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts.


1Q16 core profits in line. 

  • 1Q16 headline profit of US$15.5m (- 59% y-o-y) looks largely in line, making up 17% of our full-year estimate. 
  • There was a significant forex loss of S$14.6m, arising from exchange loss on notes payable due to the strengthening SGD against USD. This was offset by the S$13.2m gain on disposal of a service rig.


Windfarm venture shaping up. 

  • 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 and several partners 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 66% 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 20% 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/ 2016-05-13
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.85 Same 0.85


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