Ezion Holdings (EZI SP) - UOB Kay Hian 2017-02-24: 4Q16 Look Past Impairments Towards Impending Recovery

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EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings (EZI SP) - 4Q16 Look Past Impairments Towards Impending Recovery

• Ezion reported a net loss for 4Q16, underperforming our expectation. 
• Impairments were mostly related to deposits on equipment relating to its four postponed newbuilds, with 5-10% relating to impairments on its rig values. 
• Ezion’s cash flow situation has also improved, as it successfully renegotiates with its bankers and cuts capex. 
• With impairment risks dissipating and 2017 set to see an earnings recovery, we upgrade Ezion to a BUY with a P/B-based target price of S$0.45.

RESULTS

Core net earnings of US$8m; below expectations. 

• Ezion reported a headline net loss of US$66.6m for 4Q16 and US$33.6m for 2016. Excluding impairment charges of US$70.9m, a forex gain of US$20.1m and loss on disposal of asset held for sale of US$6.6m, core was a net loss of US$9.2m for 4Q16 and net profit of US$8.0m for 2016.
• The results were significantly weaker than our and consensus expectations of US$37m and US$41m respectively. 
• Results were weaker than expected due to two units that temporarily came out of work for 1-2 months during the quarter.

Impairment of US$70.9m were specific provisions. 

• The impairment charge of US$70.9m were specific provisions for the following three items: 
  1. additional write-down of US$4-7m on chartered assets that experienced lower than assumed dayrates, 
  2. ~US$20m on trade receivables, and 
  3. the remainder were impairments on the deposits of equipment purchased for the 4 rig orders that are indefinitely postponed.

Gross margin at historical low of 12%. 

• As fewer vessels were working, and overheads remained static, gross margin was compressed to 12% for the quarter. Margin improvement is likely as more vessels are placed out to work.

STOCK IMPACT

Operational recovery likely to commence only from 2Q17 onwards. 

• Ezion faced some unanticipated issues in its 4Q16 operations, resulting in the results slip. These issues are expected to persist into 1Q17, with operational pick-up likely to come earliest in 2Q17.
• These issues include delays due to weather and difficult business negotiations on existing charters. Management’s guidance for future fleet deployment is as follows for 2017: 
  • 1H17: Four units returning to work, one unit exiting work (net three units working) 
  • 2H17: Five units returning to work, one unit exiting work (net four units working) 

Reduction of US$270m in capex. 

• Ezion announced that it was indefinitely postponing the construction of four service rigs, freeing up US$270m in cash commitments. We understand that this is for two refurbished and two newbuild service rigs.

Cashflow issues stabilised, positioned for long-term recovery. 

• As guided by management, Ezion has successfully renegotiated its net annual principal repayment with its bankers, matching it with their operating cashflows. Moreover, with the much-needed capex reduction, cashflow pressures have largely eased. 
• The new framework provides a sustainable route for Ezion to position for the recovery.

On impairment risks. 

• The auditors have in this round of audit reviewed the contractual dayrates for Ezion’s existing fleet and applied discounts for certain vessels that had lower than expected dayrates. As the impact of lower cashflow in a single year is small in the DCF projections, the resulting impairment was small, coming at only US$4m-7m for the quarter. 
• The impairment risk arises from the dayrates that Ezion gets, and we are comforted by management’s comments that their service rigs are critical to clients’ production plans. Furthermore, there has been stability in operating budgets amid the improving oil price outlook. 
• Based on these factors, the risk of their rigs losing work, or facing more dayrate reductions is reduced, in turn leading to a lower likelihood of large impairments as long as oil price stability is maintained.

EARNINGS REVISION/RISK

Cut 2017/18 earnings forecasts by 40% each. 

• We have revised our numbers for 2017 and 2018 to a conservative US$30m (-40%) and US$35m (-40%) respectively. Our 2019 earnings forecast is introduced at US$41m. 
• Management was not able to provide complete guidance on their operational deployments for the year, owing to time constraints. We will provide an update at a later date.

VALUATION/RECOMMENDATION

Upgrade to BUY, target price lifted to S$0.45. 

• We take the view that the risk of impairments is largely behind us, and the improving oil price environment should see the start of an earnings recovery at Ezion. 
• While profitability of the business has diminished, each additional rig put back to work will drive earnings growth. 
• With another weak quarterly performance expected for 1Q17, we recommend picking up on pullbacks during the period to ride the earnings recovery that is likely to start from 2Q17 onwards. 
• We remove the 20% discount on our P/B benchmark, raising it from 0.50x to 0.65x 2017F P/B. Our target price rises to S$0.45 as a result and we upgrade to BUY.

Key risks: 

• Another company liquidation event within the Singapore O&G space, or oil price revisiting the US$30/bbl level and remaining so for a prolonged period.

Foo Zhiwei UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-24

UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 0.45 Up 0.390