Ezion Holdings - UOB Kay Hian 2016-05-13: 1Q16 ~ No Lift For This Boat Till 3Q16

Ezion Holdings - UOB Kay Hian 2016-05-13: 1Q16 ~ No Lift For This Boat Till 3Q16 EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings (EZI SP): 1Q16 ~ No Lift For This Boat Till 3Q16

  • 1Q16 net profit was weaker than expected as lesser units returned to work. 
  • Continued low utilisation of its delivered vessels crimped gross earnings while recent forex volatility has been an added drag. 
  • We expect 2Q16 earnings to be as bad or worst, with earnings uplift to come by 3Q16 at the earliest. 
  • China wind farm projects are a welcome reprieve from the O&G sector but there are execution risks. 
  • Earnings look lacklustre for the year. Downgrade to HOLD. 
  • Target price: S$0.60. Entry price: S$0.48 and below.



RESULTS


• Weaker-than-expected 1Q16 net profit of US$15.5m. 

  • Ezion reported 1Q16 net profit of US$15.5m, weaker than expected. Results were below expectations at 21% of our full- year forecast. 
  • Excluding one-offs such as US$13.1m gains from assets held for sale and US$14.6m forex loss, core net profit was US$17.0m. 
  • The earnings weakness stemmed from a 9% yoy decline in revenue as working units came down by one during the quarter, on top of 51% higher finance expense as Ezion took delivery of two units.

• Continued crimp on gross margin due to low utilisation. 

  • Gross margin for 1Q16 was a dismal 25%, down 21ppt yoy but up 1.2ppt qoq. The qoq improvement was due to two units (#1 and #19) coming on-hire during the quarter. However, with as many as nine units not working, and not expected to return to work until 3Q16 at the earliest, gross margin remains crimped. 
  • Additionally, Ezion plans to mobilise units back to Southeast Asia for MOPU conversion within the coming quarters, with its cost to be charged to COGS. Unit #10 will be affected by this mobilisation, with consideration for Units #14 and #15 as well.

• Forex loss of US$14.6m due to lack of hedging. 

  • An unexpected strengthening of the Singapore dollar to the US dollar on Ezion’s notes resulted in the US$14.6m forex loss. Hedges had previously been in place but not renewed on expiry at the advice of the banks who had guided for a strengthening of the US dollar. 
  • Management currently remains undecided on whether to re-hedge its positions and is awaiting counsel from its banks.

• US$13.1m gain from divestment of 50% stake to Indonesian partner. 

  • Ezion divested 50% of its stake in Unit #6 to its Indonesian partner, recognising a US$13.1m gain. The transaction occurred towards end-1Q16 and the unit’s earnings will be recognised as share from associate/JV going forward. 
  • Revenue and associated costs from the unit will also be de-recognised as a result.



STOCK IMPACT


• Expect an equally bad 2Q16 in the bull case. 

  • Based on the revised deployment schedule of its service rigs, additional earnings contribution from rigs returning to work in 2Q16 will be low. Only one unit at best will return to work in 2Q16. 
  • Due to payment issues in Mexico, management will be reducing revenue recognition from Unit #14 going forward. 
  • Combined with above mobilisation costs, we expect 2Q16 earnings to be as weak or probably worse than 1Q16’s.

• Earliest earnings pick-up to come only in 3Q16. 

  • A total of 3-4 non-working units will likely be deployed to work in 3Q16, providing the earliest form of an earnings uplift. 
  • Ezion plans to deploy units #13 and #24 for wind farm installation projects by 3Q16 while unit #5 is expected to complete its special survey and commence work in the Middle East by 3Q16. Unit #7 and Unit #8 are expected to return to work by 3Q-4Q16.

• Wind farm project “dayrates” comparable but earnings subject to execution risks. 

  • Management commented that for its wind farm project, there was no dayrate per se as it is paid on a project basis. Assuming Ezion completes each project within the prescribed timeframe, management commented that the implied rate would be “comparable” to prevailing liftboat dayrates. 
  • While the wind farm projects are a welcome relief from the storm in the oil & gas market, we caution that earnings from these projects are subject to execution risks. As the payment is a fixed sum, Ezion stands to gain handsomely should it complete the project faster but also stands to lose enormously should it take longer than prescribed. 
  • We think Ezion may face some execution issues in the early stages, and we have adjusted our gross margins downwards accordingly. Earnings from these projects are also recognised on a milestone basis, and will therefore be lumpy.

• Back to the drawing board for “strategic partnership”. 

  • We had previously commented that an announcement regarding a strategic partnership with a “large group” was in the works. The partnership would have enhanced Ezion’s ability to meet demand for liftboats in Asia. 
  • Unfortunately, the agreement was nullified by a change in leadership of the group. Ezion remains in talks with the new leadership to re-establish the partnership.



EARNINGS REVISION/RISK


• Raise 2016 earnings by 7% reduce 2017-18 earnings by 15% and 17%. 

  • We raise our 2016 net profit forecast by 7% to US$76m. An underlying core earnings downgrade is offset through inclusion of an estimated US$12m gain from the disposal of another held- for-sale unit. 
  • We reckon as many as six units will not be working by end-16 as compared to the implied 3-4 units provided by management, and will likely remain unemployed until end-1H17. Hence, we do not expect gross margin to recover to pre-2015 levels (~50%) and have adjusted it downwards accordingly. As a result, our 2017-2018 net profit forecasts will fall to US$129m (-17%) and US$180m (-15%) respectively.



VALUATION/RECOMMENDATION


• Downgrade to HOLD and reduce target price to S$0.60. 

  • Our valuation benchmark is 0.6x 2017F P/B, pegged to Brent crude assumption of US$50/bbl. 
  • The reduction in target price arises primarily from our reduced profit forecast for 2017 on top of adjustment for the potential dilution from its recent warrants issuance. 
  • A lack of earnings catalyst, earnings uncertainty from its maiden windfarm projects and continued drag on vessel utilisation make us cautious on the company’s earnings. 
  • Entry price: S$0.48 and below.



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/ 2016-05-13
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.60 Down 0.75


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