Ezion Holdings - CIMB Research 2017-02-23: 4Q16 In cashflow preservation mode

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - 4Q16 In cashflow preservation mode

FY16 core net profit of US$16.1m only at 49%/36% of our/Bloomberg consensus estimates due to JV and associate losses, and lower-than-expected EBIT margin.
Ezion booked US$70m in impairments of assets, receivables and equipment related to four rigs that were postponed (worth US$270m).
As its debt restructuring has completed, we expect forward annual principal repayment to match cashflows.

Maintain Add with a slightly higher TP of S$0.45, based on higher FY17F P/BV of 0.5x (previously 0.45x) due to lower impairment risks for the coming 12 months.

FY16 revenue of US$318.2m was down 9.4% yoy (FY15: US$351.1m), as two vessels were off-hire in 4Q16.
We estimate average fleet size fell to 16.5 vessels in FY16 (FY15: 18) due to lack of contracts (charter rates were too low) and delays in refurbishment (for two rigs earmarked for China), resulting in a stagnate fleet.
Management now guides for deployment of 18 vessels in 1H17F and 22 by end-FY17F (earlier guidance: 22 by earlyFY17 and 28 by end-FY17).

FY16 core net profit (US$16.1m) fell 84.8% yoy, missing our forecast due to US$2.0m JV and associates losses (FY15: US$23.4m profit; our forecast: US$8.0m profit) from impairments for plant & equipment and trade receivables. No amount was stated but 42.54%-owned Charisma reported US$8m FY16 impairment.
We understand near-term impairments of assets from its Swissco JV may not be as high as US$87m on the basis that Ezion will still be operating the vessels (vs. Swissco disposing of the business).

Ezion is not proceeding with the delivery of four rigs (worth US$270m) in light of the current dire market conditions.
Management guides for capex of US$110m for FY17 and a tentative US$100m for FY18.
In FY16, it delayed the delivery of six rigs to FY17-18 and guided for FY16/17/18 capex of US$80m-90m/US$160m-180m/US$200m.

The bulk of impairments in 4Q16 (US$43.0m-46.5m) were booked for equipment purchased for the four vessels that were postponed indefinitely; US$20m impairment was for trade receivables and c.US$3.5m-7m for specific asset value impairment.
The total amount was below the impairments of US$81.1m reported in FY15.

Ezion guided that is has completed its debt restructuring and has negotiated to repay debt according to its operational cashflow. This solution varies from its previous strategy of extending loan tenures from five to eight years and is better because it provides Ezion flexibility in loan repayment, in our view. Having said that, we believe Ezion is giving itself breathing space in view of the upcoming bond repayment in FY18F.

We cut our FY17/18F EPS by 36.1%/45.9% as we reduce our fleet size assumption for FY17/18 to 19/23 (from 24/28). We also introduce our FY19 estimates.
Despite a smaller fleet and narrower earnings, we lift our TP to S$0.45, now based on 0.5x FY17F P/BV (from 0.45x), 50% discount to historical 5-year mean P/BV of 1.0x (55% previously).
We believe the impairment and cashflow risks have been mitigated and foresee investors becoming more comfortable taking position in Ezion. Our Add rating stays.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-23

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