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 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.

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.

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