Ezion Holdings - CIMB Research 2016-11-10: Better associate turnout; still cautious for FY17

Ezion Holdings - CIMB Research 2016-11-10: Better associate turnout; still cautious for FY17 EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Better associate turnout; still cautious for FY17

  • 3QFY16 core net profit of US$9.4m was above our expectation on better associate earnings, but below Bloomberg consensus.
  • 9M16 featured 
    1. positive operating cashflow of US$120m; and 
    2. net gearing of 1.0x (excluding perpetual securities).
  • We raise our FY16F net profit by 34%, but keep FY17F-18F figures intact for now as we remain cautious of further cuts in the daily charter rate (DCR) in FY17-18.
  • Maintain Hold call. As we roll over our valuation to FY17F, our target rises to S$0.33, still based on 0.3x P/BV; pegged to ROE of 3.4% in FY17F.

Higher associates in 3QFY16 

  • 9MFY16 core net profit of US$6.8m accounted for 98% of our full-year estimate of US$6.6m, largely due to better-than-expected 3Q16 associate earnings of US$5.3m. 
  • We had also undermined the revenue, thus 9MFY16 revenue met 87% of FY16F.

Still weaker yoy 

  • Revenue fell yoy to US$79.8m (-7.4%), largely due to i) reduction in DCRs; and ii) slippage in start-up of assets due to a sluggish pace in modification/refurbishment work or cancellation/postponement by customers. 
  • 3QFY16 and 9MFY16 EBIT margins narrowed to c.15.3% and 10.4%, respectively (from 23%: 2QFY15 and 34%: 9MFY15), due to the items above.

Continued impairments in associates? 

  • Ezion continued to record impairments for its associates. 9MFY16 share of associate and JV contribution was US$2.9m. Excluding the US$11.7m impairment recognised in Aug-16, it would have reported c.US$14.6m of JV and associate contributions, in our view. 
  • We remain cognisant that further impairments are probable, given the weak standing of its JV and associates.

Further pressure on DCRs 

  • Management guided that there is still downside pressure on DCRs, implying that earnings risks have not abated. 
  • We estimate contracts for five assets will expire by end- 16/FY17 while nine assets are currently still non-operational. These assets could face lower DCRs moving forward, a risk to Ezion's forward earnings growth, in our view.

Debt extension exercise still underway 

  • Management hopes to finalise its debt extension exercise by end-FY16. If successful, this could lower its debt repayment for FY17-18F. As at end-Sep, current borrowings stood at US$352.9m, non-current borrowings at US$796.4m, and YTD repayments at US$149.9m.

Upgrading FY16F core net profit; keeping FY17-18F for now 

  • We raise our FY16F core net profit by 34% to US$24.4m, largely due to higher revenue and associate forecasts.

Maintain Hold with slightly higher target price of S$0.33 

  • We believe Ezion will be one of the main survivors of the current sector downturn as it still churns positive operating cashflow, and can easily cut capex to alleviate cashflow burdens. But we remain cautious as 
    1. DCR pressures have not abated and 
    2. utilisation rates are still low; key drivers for positive operating cashflows in FY17-18. 
  • Upside risks are better-than-expected revenue upon a sector recovery. 
  • Downside risks are further margin erosion and impairments from JV and associates. All eyes are on 4Q16 results.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-10
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.330 Up 0.320