Ezion Holdings - UOB Kay Hian 2016-07-04: Making Sense Of The Rights Issue And Venturing Into China Offshore Wind Farm

SGinvestors.io

EZION HOLDINGS LIMITED 5ME.SI 

Ezion Holdings (EZI SP) - Making Sense Of The Rights Issue And Venturing Into China Offshore Wind Farm

• Ezion announced last week its formal entry into the China offshore wind farm market, as well as a 3:10 rights issue at S$0.29/share. 
• We attended an analyst briefing for the capital raising, and present key takeaways. Evaluating management’s bullish outlook, we are cautious of this translating into management’s view of higher earnings. 
• We think earnings have likely bottomed but are likely to remain rocky for the coming quarters. 
• Maintain our HOLD rating, with a lower target price ofS$0.51, adjusted for the rights issue. Entry price at S$0.45.

WHAT’S NEW

Announces formal entry into China’s offshore wind farm market. 

• Ezion announced last Thursday evening its formal entry into China’s offshore wind farm market. It has established a 49:51 JV company with Sinotrans & CSC Holdings to form Sinomarine & Teras (Tianjin) Offshore Co. Ltd. (JVCo). The JVCo has also formed a strategic partnership with China Huadian Corporation, and together they aim to operate two service rigs by end-16. These rigs will be deployed into offshore wind farm installation projects.

Proposes renounceable rights issue at S$0.29/share. 

• In a separate announcement, Ezion proposed a rights issue at 3 rights:10 ordinary shares. The price of each right is S$0.29, representing a 44% discount from Thursday’s close of S$0.52. This would see the issuance of up to 487,313,310 shares, raising net proceeds of up to S$138m. 
• As a show of support, CEO Chew Thiam Keng and his wife, Mdm Chan, have irrevocably undertaken to subscribe and pay for 43,344,000 shares, and underwrite up to a maximum of S$50m of excess rights (172.4m shares, 35% of rights shares to be issued) from this issue. 
• The theoretical ex-rights price is S$0.467. Proceeds will be directed towards the potential acquisition of offshore marine assets, as well as the upgrading and modification of its assets.

Ezion held an analyst briefing in light of the rights issue. 

• Key takeaways are as follows:
  • Rights Issue:
    • Ezion is doing this rights issue to achieve several strategic objectives. The following two stand out: 
      1. to bolster their working capital for higher activity in the next 6-12 months, and 
      2. have sufficient capital set aside to convert more vessels for wind farm work in China or for conversion of vessels to capture an uptick in production related activity.
    • On why a rights issue and not more debt, the response from management was to "balance out their capital structure". Perpetuals were considered, but was disregarded due to the instrument being "out of favour".
    • CEO Chew Thiam Keng has a bullish outlook on E&P activity for his business. He foresees rising activity from oil producers, and expects several developments in the near term owing to pent-up demand. This could happen as early as 1Q17. Developments on the horizon include upsizing of contract work scope (with higher compensation), as well as the introduction of several strategic partners (outside the O&G space) who will be able to provide additional "capital, credibility and moral support" to his business.
  • China Wind Farm Business Prospects:
    • Ezion will be putting two liftboats to work in China first, with scope for another three more. Capex of US$5m-6m per liftboat will be required for the first two. Should opportunities for the other three appear, it would cost Ezion US$7m-8m per liftboat to modify the vessel for work.
    • Details on the economics of the wind farm JV could not be divulged. The most management could disclose was that it would be similar to bareboat terms, but not at rates "to scream about". However, they will be the first overseas company to break into the Chinese wind farm market, and this will provide them first-mover advantage should the Chinese want more liftboats to pursue more installation projects.

STOCK IMPACT

25% EPS and 15-18% BVPS dilution. 

• Post our estimate adjustment, the rights issue results in a 25% dilution to 2016F EPS of 4.5 S cents. 
• Our BVPS falls 18% from S$1.16 to S$0.95. 
• On a fully-diluted basis, our BVPS falls only 15% from S$0.95 to S$0.81.

China wind farm offshore prospects may not be as rosy as painted. 

• Management describes the opportunity for China’s offshore wind farm prospects as “huge”. Having missed its 5GW installation target in 2015 (only 61MW installed and another 1.7GW under construction), China had in its 13th Five-Year Plan, set a target of 10GW by 2020. This new target actually represents a cut from the original target of 30GW.

Wind farm installation target “not mandatory”. 

• In a 24 June article from Reuters (link) officials from China’s National Environmental Administration said that the 2020 target was “not mandatory”, and that they preferred to take the time to gain experience and improve the technology.

Wind farm developers may run into financing issues. 

• Offshore wind farms cost twice that of onshore wind farms. Wind farm developers are currently running on government subsidies – which take as much as 6-12 months to arrive – so cash flow will become an issue. The projects are likely to run into financing issues that will slow down installation progress or stymie future projects. 
• Ezion is presumably aware of the risk, judging from its deployment of two vessels in the interim.

Recovery in offshore activity may not lead to higher earnings. 

• Management highlighted that the recovery in earnings had led to greater client enquires/request for Ezion's vessels, and stated how one client requested for modification of the vessel to meet a bigger work scope. In return, they would pay more for the vessel. 
• We feel that the incremental earnings from this is not as impactful as a re-deployment of its non- working units, which remains the core issue that had resulted in poor earnings last year.

EARNINGS REVISION/RISK

Tweak earnings by 1-2%. 

• We have adjusted our 2016 earnings downwards to US$75m (-1%), and US$126m (-2%) on lower dayrate assumptions for the two service rigs entering the Chinese offshore wind farm market, one of which we now assume a 4Q16 work start instead of 3Q16.

VALUATION/RECOMMENDATION

Maintain HOLD, target price lowered to S$0.51. 

• We have adjusted our target price to reflect the rights issue. The impact from our estimates change was minimal. Post the rights issue, we think the downside earnings risk is minimal, as it is clearly at its worst. 
• At the same time, Ezion’s adaptation to the new business environment and likely teething issues with its maiden entry into China limit earnings growth, and share price is likely capped on the upside. 
• While we like Ezion for its more robust fundamentals, we are sceptical about management’s bullish business outlook and prefer to wait for this to be reflected in its results. Thus, maintain HOLD with entry price at S$0.45.

SHARE PRICE CATALYST

• Contract win announcements, higher oil price.

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