Ezion Holdings - DBS Research 2016-08-12: 2Q hit by underperformance of associate/JV

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - 2Q hit by underperformance of associate/JV

Ezion’s share price has been dragged down by the rights issue and weak sentiment following Swiber’s incident.
While Ezion’s net gearing ratio of c.1x (post rights) may appear high, Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balances.
Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 2H16, delivery of newbuild liftboats, and successful diversification of its customer base to win new charter contracts.

Ezion reported headline net profit of US$19.8m for 2Q16, boosted by gains on disposal of its 51% stake in its Indonesian unit (for re-flagging) of approx. US$14m. Stripping this out, core profit would have been c.US$6m, lower than US$17m in 1Q16.
The underperformance came from a sequential decline in share of associate/JV income, which declined by US$7m to US$1.1m, and an increase of S$3m in cost of sales as Ezion took delivery of unit #9 at end 1Q, but this was taken off the fleet for modification shortly after. We trimmed FY16/17 net earnings by 19%/8% factoring in the weak 2Q, lower associate/JV income and changes in delivery schedule.

China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed.
A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed a MOU with one of the top five IPPs in China – Huadian - and several partners to speed up the installation of offshore windfarms using liftboats.

We value Ezion based on 0.6x FY16 P/BV, arriving at a target price of S$0.58. This implies 101% upside potential.

Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 5%. We have prudently assumed that rates will reduce by 15% p.a. in FY16-17Five service rigs are due for charter renewals in FY16.
Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

Pei Hwa Ho DBS Vickers | http://www.dbsvickers.com/ 2016-08-12

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.58 Same 0.77