Ezion Holdings - CIMB Research 2016-08-11: Contagion risks

Ezion Holdings  - CIMB Research 2016-08-11: Contagion risks EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Contagion risks

  • 2Q6 core net profit of US$6m missed our expected US$15m. 1H16 core net profit of US$9m formed 22% of our FY16F and 13% of consensus.
  • Key disappointment came from weaker gross margins and sharp plunge in share of associates which suffered impairment losses.
  • Cashflow from operations still positive at US$27m with FCF at US$14m; net gearing stood at 1.1x.
  • Downgrade to Hold with a lower target price of S$0.32, now based on 0.3x P/BV (previously 0.55x), pegged to its average ROE of 3% for FY16-17.

Revenue stable qoq 

  • Revenue remained stable in 2Q16 at US$84m (1Q16: US$82m) with 16 rigs working during the quarter. 
  • We expect the working units to increase to 18 by end-16 with the addition of service rig 8 (already enroute to Europe as of Aug) and service rig 33 for Middle East deployment. 
  • Management had guided the working units to be 22-23 units by end-16. We expect a total of 18 units in operation by end-16 Margins dipped on higher depreciation and maintenance costs 
  • Gross margins were below expectations at 21% (1Q16: 25%), bringing 1H16 margins to c.23%. 
  • We believe the depreciation and maintenance costs incurred for unchartered units are the key cause for the weakness. 
  • With more vessels coming in for deployment in 2H16, we believe gross margins could remain at the current level. 1H16 EBITDA margins dropped to 52% from 70% in FY15.

Hit by share of associates and JVs 

  • The share of profits from associates and JVs plunged 86% qoq to US$1.1m due to losses incurred at its 50%-owned JV, Posh Terasea as a result of provisions for doubtful debts. 
  • We believe there could also be impairment charges booked for its 18%-owned associate, Ausgroup, which has suffered impairment of receivables and goodwill since 1Q16. 
  • Our EPS is cut by 39-66% for FY16-18F on lowered margin assumptions and lowered expectations from associates/JVs.

Downgrade to Hold with lower target price of S$0.32 

  • We were less inclined to downgrade to Reduce as Ezion is under-owned, still generating positive cash flows and earnings from charter contracts. 
  • Rate reduction has bottomed with no new negotiations for rate cuts in the past 3 months. Share price could be capped in the near term due to negative sentiment and going concern risks across small-cap O&M names in Singapore. 
  • FY17 earnings recovery also hinges on the sustainability of oil prices at above US$40/bbl. 
  • Impairment for receivables could be a key risk.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-08-11
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.32 Down 0.530