Ezion Holdings - OCBC Investment 2016-11-11: A balancing act

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EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - A balancing act

• Soft 3Q16.
• Still planning for capex.
• Tough environment.

3Q16 results lacklustre, as expected 

• Ezion Holdings reported a 7.4% YoY drop in revenue to US$79.8m and a 69.1% drop in net profit to US$9.4m in 3Q16, mainly due to lower gross profit margin of 17.5% in the quarter vs. 21.3% in 2Q16 and 29.0% in 3Q15. 
• One more rig became operational in the quarter, while one was taken off the fleet. A rig was also renewed at a softer-than-expected rate under the poor operating environment. 
• Meanwhile, the group is keeping full crew for its rigs (none are laid up), hence margins were also pressured. 
• Results were within expectations, as management had previously guided for a lacklustre 3Q16.

Updates on fleet 

• By the end of 3Q16, there were 17 service rigs working, and management expects this number to increase to about 22 by the end of 1Q17. 
• We understand that in Ezion’s fleet, there are two rigs whose charter rates are relatively high compared to current market conditions, as the contracts were locked in some time ago. The rest of the fleet have rates that are similar to market.

Planning for capex… 

• As Ezion is modifying a few more of its existing service rigs and taking delivery of two or three new units by the end of 2017, managing its cashflow and gearing is imperative. As such, it may 
  1. dispose at least another existing service rig, 
  2. delay or cancel a few of its past committed projects that no longer make economic sense, and 
  3. invite potential JV partners to co-own assets. 
• Estimated capex for FY16 is US$80-90m, while FY17 may see US$160-180m of capex.

… in a tough environment 

• Overall, management summarised that a key problem that the group faces currently is the cash-strapped situation that its customers are in; a silver lining is that its customers still value the group’s products which are still in demand. 
• As for the banks, they are busy tending to weaker lenders and are also hesitant to extend new credit to companies in this sector. 
• Maintain HOLD with S$0.35 fair value estimate.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-11-11

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.350 Same 0.350