Ezion Holdings - CIMB Research 2017-02-19: Net loss warning for 4Q/FY16 results due on 23 Feb

Ezion Holdings - CIMB Research 2017-02-19: Net loss warning for 4Q/FY16 results due on 23 Feb EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Net loss warning for 4Q/FY16 results due on 23 Feb

  • Ezion expects to report a net loss for 4Q16 and FY16 due to possible impairments for its assets. Impairments of at least US$45m-50m are implied, in our view.
  • The news is not a huge surprise to us and the impairment exercise, subject to quantum, could help to remove overhang on the stock.
  • Focus for 4Q16 results will be on chartering prospects and the impact of consolidating Swissco’s 50% JV portion in 2017.
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  • Nonetheless, a knee-jerk negative share price reaction is expected, given that this will be the first time that Ezion reports a full-year loss.
  • We maintain our call pending the results announcement on 23 Feb.

Resetting the balance sheet

  • We had previously mentioned that there is a high likelihood of impairments given the weak standing of Ezion’s JV and associates; hence the announcement of impairments was not huge surprise. 
  • It is also a non-cash item and as such, the exercise, subject to quantum booked, could clean up Ezion’s balance sheet and remove any overhang doubts on the stock.

At least US$44m-50m worth of impairments?

  • Our implied minimum impairments of US$45m-50m is based on a back-of-the envelope calculation of the likely quantum that could render Ezion’s annualised reported 9MFY16 net profit of US$33m (i.e. FY16F US$44m) becoming negative.
  • Source of the impairments would include those for its own assets; and investments in joint ventures and associates i.e. Swissco and Charisma Energy, in our view.

Own asset impairments highly likely from services rigs

  • In 4QFY15 results, Ezion booked US$81.1m (out of US$84m) impairment losses for plant and equipment and trade receivables, mainly for the 2-3 service rigs linked to Pemex in our view. 
  • At the time, those contracts faced slow/no payments, leading to Ezion booking impairments for them. It is now converting them to MOPUs in the hope of securing contracts in FY17F. 
  • We estimate Ezion has seven service rigs unchartered (including 2-3 Pemex rigs), which could be the source of asset impairments in 4Q16.

JV and associate woes continue

  • Ezion has also continued to be impacted by its impairments of its JVs and associates. In Aug 16, its associate Ausgroup made provisions that impacted negatively on Ezion’s share of JV and associate results by US$11.7m.
  • Its 50% JV partner Swissco (with stakes in 4 assets) filed for judicial management in Nov 16 and wrote-off cumulative c.US$87.1m in impairment losses on the rigs, trade receivables, and loans relating to the JV in its 3Q16 results.
  • Last week, its associate Charisma Energy issued a similar net loss warning announcement for its upcoming 4Q16 results due to be released on 22 Feb, which could spill over to Ezion.

Where do we go from here?

  • Besides the impairments booked, we believe the street will focus on: 
    1. forward utilisation of Ezion’s rigs (9 of 26 rigs remain unchartered, and an estimated 4-5 have contracts expiring in FY17), 
    2. the possible financial impact of Ezion absorbing Swissco’s 50%-stake (Ezion submitted bids for the stake in 3 assets at end-16); and 
    3. debt repayment outlook from FY17 post-completion of tenure restructuring of the majority of Ezion’s loans. 
  • Unless those factors turn significantly positive, forward capex spend by Ezion will likely remain muted, in our view.

Expect knee-jerk negative share price reaction

  • We maintain our estimates and P/BV-based target price for now pending Ezion’s results; but expect a negative reaction to last week’s announcement given that this would be the first time 
  • Ezion is reporting a full-year net loss, albeit at non-core level.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-19
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