Ezion Holdings - Maybank Kim Eng 2016-08-12: 2Q in line; Upside by 4Q; Buy

Ezion Holdings - Maybank Kim Eng 2016-08-12: 2Q in line; Upside by 4Q; Buy EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - 2Q in line; Upside by 4Q; Buy

Cutting EPS est.’s and TP post rights adjustment 

  • Headline 2Q16 PATMI of USD19.8m (-31% YoY, +28% QoQ) was in line with our estimates. 1H16 PATMI of USD35.3m formed 46%/44% of our/consensus FY16E. But 2Q16 was bumped up by USD14.6m of disposal gains. 
  • Disappointment came from impairment charges and weaker contributions from its associates/JVs. 
  • We cut FY16/17/18E net profits by 22/19/17% as we adjust for lower income from associates and slower contributions from more liftboats. 
  • TP cut 37.5% to SGD0.45, which includes rights adjustment after our research blackout on the stock. TP is now based on 0.5x FY17 diluted P/BV (from 0.7x FY16 P/BV) to reflect lower ROE and higher equity risks. 
  • Maintain BUY.

No new units in 2Q16, 4-5 more by year-end 

  • No additional units contributed to profit in 2Q16, but Ezion expensed depreciation and costs associated with three non-contributing units, leading to lower GPM. The company expects a contribution from 22/23 units by year-end from 17 in 2Q16. 
  • One windfarm unit is already on its way for deployment, while another two contracts have not been concluded. Windfarm jobs offer revenue diversification, but are not as profitable. Most additional liftboat units are also likely to come onstream towards 4Q16, and thus we do not expect a significant improvement in 3Q16, and as a result, have deferred our contribution schedule.

No immediate balance-sheet risks 

  • Net gearing was 1.09x in 2Q16, down marginally from 1Q16 of 1.1x. 
  • Still, we think Ezion’s balance-sheet risk is manageable. It has generated positive FCFs over the past two quarters and paid down USD110m of debt YTD. 
  • We understand it intends to restructure the tenure of its short-term debt to better match its cashflows.

Maintain BUY, but re-rating nearer to 4Q16 

  • Recent sell-down was partly due to the negative reactions to its rights issue (c.USD100m) and Swiber’s failure. But it will be hard for the stock to recover before 4Q, due to the depressed income from associates/JVs, the delayed contribution from additional units, and negative sentiment after Swiber’s downfall. 
  • Maintain BUY, as we think Ezion has the ability to generate positive FCFs, has low risk of failing like Swiber, and an early beneficiary of a sector upturn. 
  • Most negative are likely priced in.

Key takeaways from post-results luncheon 

  • We hosted the company CEO, Mr. Chew Thiam Keng and Corporate Finance Head, Mr Alan Chong for a post-results luncheon. Sentiment was sombre with Ezion citing several challenges it is facing. But we expect Ezion to survive the downturn. It has done a recent rights issue of c.USD100m to shore up balance sheet, will be restructuring short-term debts with banks and we expect it to generate positive FCFs over FY16-18E. We believe that this would help it ride through the downcycle.
  • Key risks to our view are if oil price sinks to USD30-35/bbl and a sustained downturn through to 2018 which may affect its ability to repay it bonds due in 2019.
  • We also think that Ezion is among the most well-run oil services company in Singapore and it’s taking proactive steps to handle the challenges. 

Key discussion points during the luncheon were:

On impact of Swiber. 

  • Ezion’s business is different from Swiber and it has no direct exposure to Swiber. The latter’s revenue is lumpy and relates to capex-heavy parts of the oilfield lifecycle, but Ezion is exposed to the production and maintenance phases and receives more stable charter income. 
  • While there is no direct impact, management said that Swiber’s issue has resulted in banks tightening credit for the sector. Therefore, we think that it would be hard for any players to secure any new loans from now on.

On charter rate pressure. 

  • Clients have not pressed for more rate reductions after the last round, but Ezion does not rule out more pressure if oil prices were to fall to USD30-35/bbl.

On client payments. 

  • Clients continue to be slow in paying. Ezion is looking at ways to improve its receivables collection. In one instance, it is prepared to provide the client with an additional asset to get on their priority payment list and receive faster payments for its existing contracts. To safeguard its exposure, it will only do so if the client provides a least a bank guarantee.

On impairment risks. 

  • No additional impairments may be necessary, unless: 
    1. the oil price falls to USD30-35/bbl; or 
    2. more corporate failures happen in the industry leading to contagion effect.
  • On windfarm diversification. Ezion expects to have three units working by year-end, one of which would likely be deployed in a week’s time.
  • This offers diversification benefits and some negotiating power with existing oil and gas clients, but the profitability for such contracts is not high.

On its short-term debt. 

  • Ezion will be meeting with banks to extend the tenure of its short-term bank loans over the next week. Management indicated that Singapore banks are reluctant to restructure loans from say five years to 7-10 years as they would then have to be classified as an NPL. But Ezion has been assured by the banks that they are willing to support an extension, given their relative strength vs other oil services players. 
  • Management also said that as long as it can keep to its repayment schedule, there are little financing risks, as these are amortising loans, as opposed to working capital or project finance loans that need to be renewed. 
  • Ezion also believes it has sufficient cashflow to repay bonds due in 2018. However, it acknowledged that it may have some challenge for bonds due in 2019 and beyond if the oil market does not recover by then.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-08-12
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.45 Down 0.720