Ezion Holdings - DBS Research 2017-02-24: Positive initiatives to manage cash flow

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Positive initiatives to manage cash flow

4Q16 earnings below expectations on impairment losses and lower utilisation.
Indefinite postponement of four new service rigs reduces capex by US$270m.
Successful revision of debt repayment to match cash flow generation alleviate balance sheet stress.

We have slashed FY17-18F earnings by 22-55% after pushing back vessel deliveries.
Nonetheless, we believe core earnings are near bottom and we are comforted by Ezion’s positive operating cash flows and lower gearing which are much needed in this environment.
Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balance.
Re-rating catalysts stem from oil price rebound, earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017/2018, and successful diversification of its customer base to win new charter contracts.

Ezion’s reported a net loss of US$66.6m in 4Q16, resulting in full year losses of US$33.6m. 4Q16 was dragged by US$70.9m impairment on assets and receivables as guided.
Core profit in 4Q16 was also weaker, with 9% q-o-q decline in revenue to US$72.6m, due to lower utilisation and gross margin contraction of 5.4ppts to 12.1%. The lower revenue was due to the off hire of two service rigs.

China had set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with approximately only 2.5GW offshore wind capacity installed.
A liftboat would facilitate installations of 200MW offshore wind capacity a year. Assuming 27.5GW of wind capacity to be installed over the next five years or 5.5GW per year, there would 25-30 liftboats required in China.
Ezion has signed an MOU (Memorandum of Understanding) with one of the top five largest state-owned power generation enterprises in China – Huadian – and several partners to speed up the installation of offshore windfarms using liftboats. The first service rig for a China windfarm is expected to commence in 1Q17.

We value Ezion based on 0.7x FY17 impaired book, arriving at a target price of S$0.62. This implies 57% upside potential.

We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 7% due to a low-base effect.
We have prudently assumed that rates to fall by 10% in FY17. Five service rigs are due for charter renewals in FY17. Meanwhile, the Mexican contracts appear to be at risk of termination as these consist of a few units that are deployed for drilling and there have been several cancellations in that region.
Competition may be keener ahead with more new entrants attracted to the growing liftboat market.

HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2017-02-24

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