Ezion Holdings - CIMB Research 2016-07-01: Taking the "Right" path

Ezion Holdings - CIMB Research 2016-07-01: Taking the “Right” path EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings - Taking the “Right” path

  • Ezion will undertake a 3:10 rights issue at S$0.29/share to raise up to S$141.3m.
  • 70% of the fund will be used to upgrade the existing fleet and the remaining 30% for working capital. The CEO and his spouse have committed to undertake up to S$50m.
  • Albeit unexpected, the spare capital could give Ezion some head room to prepare for a recovery in the fossil fuel segment.
  • We reduce our target price to S$0.53, still based on 0.55x P/BV incorporating full subscription of rights. Oil price recovery is a key potential catalyst.

3-for-10 rights issue to raise S$137.5m

  • Ezion announced that it is undertaking a 3-for-10 renounceable, fully underwritten rights issue at S$0.29. 
  • The rights are expected to raise S$137.5m (net of expense) of new capital. This will increase its share base by 30% to 2,073m shares.
  • The ex-date is 7 July and the rights issue will be completed by 8 Aug and available to all shareholders.

Commitment from CEO

  • The CEO, Mr Chew Thaim Kheng, and his spouse, Madam Chan, have jointly provided an irrevocable undertaking to subscribe up to S$50m, or 35%, of the total rights issue. 
  • We estimate Mr Chew’s stake in the company could go up to c. 19% post rights. 
  • We believe his commitment could signal to the market that the company’s outlook could turn positive in the medium term.

Preparing for recovery

  • 70% of the proceeds (c.S$96m based on maximum subscription) will be used to fund new marine assets and to upgrade existing service rigs/liftboats. 30% will be used for general working capital, in order to prepare for a recovery in oil prices, in our view. 
  • Ezion has received queries for expansion of workscope from customers, requiring additional modification of its existing fleet. 
  • We estimate net gearing to improve to 0.8x from 1.1x in 1Q16 post rights. The capitalization also leaves more headroom to gear up to fund new partnerships.

Windfarm to diversify its portfolio

  • If oil prices remain stagnant, windfarm is Ezion’s next play, in our view. It has formally entered the China offshore wind farm market by establishing Sinomarine & Teras (Tianjin) Offshore Co, a 49/51 JV between Ezion and Sino Trans & CSC Holdings
  • Two of Ezion’s rigs, Sunrise and Ocean (unit 13) will be deployed to the JV on a bareboat basis. Part of the proceeds (c.US$10-12m) will be used to convert these rigs for windfarm installation purposes.

Overhang will weigh on share price temporarily

  • Current share price has reflected the theoretical ex-rights price of S$0.46. 
  • We believe share price could be depressed in the short term as investors are jittery on small-cap cyclicals, with more fund-raising by other players to come. 
  • We adjust our core EPS forecasts by 13-24% and lower our target price to S$0.53, still based on 0.55x CY16F P/BV, to reflect the issuance. 
  • We maintain our Add call. 
  • Ezion is under-owned, in our view, and could be a candidate for short-term trade on spike in oil prices. It is trading close to trough valuation at 0.5x P/BV. An oil price recovery is a key catalyst. 
  • Potential risks to our call include sharp decline in oil price and asset impairment.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-07-01
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.53 Down 0.63