EZRA HOLDINGS LIMITED
5DN.SI
Ezra Holdings (EZRA SP) - 3QFY16: Losses Aside, Ezra Should Be Covered Till FY17
- Despite a huge 3QFY16 loss of US$235m, driven primarily by a US$181m loss from the disposal of EMAS-AMC, our cash flow estimates show it should last till FY17. This assumes proceeds from the sale of PV Keez, and the continued grace of its bankers to manage its FY17 cash shortfall of US$134m. Beyond that, Ezra’s financial position has become challenged.
- Expect further asset disposals or worse, equity raising. A real cash crunch will occur in FY18.
- Reduce target price to S$0.064, and maintain HOLD.
- Entry price: S$0.051.
RESULTS
Core loss widens to US$26.3m.
- Ezra’s net loss widened to US$235.1m, from a loss of US$3.4m in 3QFY15. The losses were larger than expected. This was primarily attributable to one-offs:
- a US$181m loss from the disposal of EMAS-AMC, and
- a US$25m allowance for bad debt.
- Excluding one-offs, core net loss was US$26.3m, as compared with a core loss of US$9.1m in the prior period. In 9MFY16, net loss was US$473.8m, which excluding the one-offs would have been a loss of US$78.1m. The larger-than-expected disposal loss was due to a further deterioration in the subsea business up till the deal was formally completed.
EMAS Chiyoda subsea JV reports a profit.
- After a long standstill in the business, the subsea JV returned a profit, reflected in the higher share of JV earnings. This was attributed to the US$1.1b orderbook works secured, all of which had commenced engineering works. The orderbook is expected to be recognised over two-three years.
Net gearing spiked to 1.9x on sharply reduced shareholder equity.
- Ezra’s net gearing spiked from 1.0x to 1.9x, as the near half a billion loss halved shareholders' equity. This compares to the marginal increase in net debt from US$1.08b in end FY15 to US$1.11b as of 3QFY16.
STOCK IMPACT
Only cash flow matters now.
- As Ezra right sizes its business, earnings will likely face large impairments or losses as it re-jigs its asset portfolio.
- Losses will be the norm rather than the exception. Cash flow takes precedence over earnings now.
Banks will probably remain supportive only on existing loans.
- According to management, banks remain supportive of Ezra. With the banks being deeply vested, we posit their support likely extends up to refinancing of existing loans. That said, signs of the banks becoming uneasy with their exposure can be seen from the recent requirement that Ezra pledges its shares in Triyards and EMAS for a S$100m refinancing loan in Mar-16.
Cash shortfall of US$134m in FY17.
- Ezra is estimated to have term loans of US$265m due in FY17. On further assumptions regarding its short-term revolving facilities and successful sale of PV Keez, its FY17 cash shortfall is US$134m.
- We caveat that this is our estimate (management could not reply in time before report release) and might be smaller as Ezra has renegotiated its loan repayment terms.
Asset disposals the preferred route; further equity raising possible if this does not happen.
- Assuming that the banks will not finance the shortfall, this will have to be met by asset disposals or further equity raising.
- Given the quantum, disposal of non-core assets still remains a viable route and stakes in large assets will be chosen first. Should asset sales not suffice, Ezra may tap equity from the capital market.
- Assuming the full US$134m be raised, we estimate the share price to fall to a theoretical ex-rights price of S$0.057 (-12%), assuming a 20% discount from the last close and a 120:100 rights issue ratio. We would turn negative if this happens.
PV Keez transaction is critical to meeting Ezra’s FY17 cash flow needs.
- Any delay stretching into FY18 or termination of the deal will be negative to Ezra.
Real financing crux lies in FY18.
- The real cash crunch for Ezra is estimated to be in FY18, where its cash shortfall widens to US$255m, owing to its S$150m MTN becoming due. With few unencumbered assets likely left by then, the company will be in a difficult position should the operating environment not improve significantly.
EARNINGS REVISION/RISK
Revised earnings to a deeper loss, and a loss for FY17.
- Our previous earnings estimate did not take into account the steeper-than-expected loss from the disposal of EMAS-AMC.
- We have revised our FY16 earnings downwards significantly to reflect this. Our earnings forecast for FY17 has been reduced from a profit of US$13m to a loss of US$5m, while FY18 profit is reduced from US$15m to US$9m.
- Our earnings estimates do not take into account one-offs, save the disposal effects from the PV Keez transaction.
VALUATION/RECOMMENDATION
Maintain HOLD, lower target price to S$0.064.
- The sharp fall in shareholder’s equity from the disposal loss, as well as our revised forecasts have led to a sharply lower target price of S$0.064, from S$0.09 previously. This is benchmarked to 0.25x FY17F P/B, which remains unchanged from our previous report.
- Given the small 1.5% downside, and that Ezra will likely remain a going concern in the next one year, we maintain HOLD.
- However, we re-iterate that any setback that negatively impacts cash flow or capital raising will make us turn negative on the counter.
- Entry price: S$0.051.
SHARE PRICE CATALYST
- A contract win for EMAS Chiyoda Subsea.
- Successful divestment of non-core assets.
Foo ZhiWei
UOB Kay Hian
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Andrew Chow CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-07-18
UOB Kay Hian
SGX Stock
Analyst Report
0.064
Down
0.09
