Ezion Holdings - CIMB Research 2017-03-28: Assuming full control of 4 rigs

Ezion Holdings - CIMB Research 2017-03-28: Assuming full control of 4 rigs EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - Assuming full control of 4 rigs

  • Ezion finally announced it entered into agreements to buy the remaining 50% stake in its JV with Swissco Holding Limited. Estimated cash outlay is S$5.0m.
  • A 100% stake implies at least c.US$86m worth of consolidated loans, and higher future interest costs. We think it may find a strategic investor to manage the impact.
  • Maintain Add and TP, based on 0.5x FY17F P/BV (50% discount to 5-year mean).

Acquisition involves two companies and net cash outlay of S$5.0m

  • The acquisition involves Swissco’s 50% stake in two companies – Strategic Offshore Limited (“SOL”) and Strategic Excellence Limited (“SEL”); which own four service rigs (SOL: GSP Atlas, GSP Fortuna, GSP Orizont (GSP rigs); SEL: Strategic Excellence).
  • Ezion would also assume the control of future engagements with existing customers of the JV companies.
  • According to Swissco’s announcement on this exercise dated 27 Mar 17, SOL and SEL have cumulative loans outstanding worth at least c.US$86m for these four assets (SOL:US$60.2m/SEL:US$25.7m), which we believe Ezion could assume once the acquisition is completed.

No P&L impact

  • Ezion previously guided for no P&L impact as any negative goodwill could be offset by potential impairments given these four assets currently have long outstanding account receivables.
  • According to Swissco, c.US$104m worth of receivables are still due for the four assets. The GSP rigs (of SOL) were bareboat chartered to a Romanian operator – Grup Serivicii Petroliere (GSP) – and have charter hire payments outstanding since Oct 15 and receivables of US$85.3m as at end-Dec 16. Strategic Excellence (of SEL) has charter hire payments outstanding since Apr 15 and receivables of US$19.3m as at end-Dec 16.

Potential strategic partner?

  • The acquisition would nudge Ezion’s total debt to US$1.6bn (end-16: US$1.5bn) and bring net gearing (ex-perpetuals) to 1.14x (vs. end-16: 1.07x). It could also raise future interest costs by US$2.3m p.a., based on our average 2.6% interest cost assumption for FY17-19F.
  • While both the net gearing and interest cost impacts are negligible, we believe that Ezion could consider finding a strategic partner for the 50% stake largely to spread the operational risks, i.e. contract renewal risks.
  • As at end-16, Ezion had 15 vessels operational (vs. its existing fleet of 26 vessels), and taking on the additional risk of contract renewals for these four vessels could be operationally cumbersome.

Risks still hinge on assets’ contract extensions

  • While it guided for no P&L impact from the acquisition in the near term, we believe future impairment risks exist, especially if Ezion fails to successfully negotiate the underlying contracts, and is unable to secure new replacement contracts thereafter.

Maintain Add

  • We maintain our net profit forecasts for now and our Add call; we see potential catalysts from 
    1. vessel additions in FY17-19F and 
    2. investors taking more comfort from lower impairment and cashflow risks in the near term.
  • We believe our TP of S$0.45, based on 0.5x FY17F P/BV (50% discount to historical 5-year mean of 1.0x), prices in near-term impairment and cashflow risks.
  • Risks to our call are: 
    1. weaker daily-charter-rates (DCR) for Ezion’s fleet; 
    2. further delays in vessel additions; and 
    3. further impairments in associates and JVs.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-03-28
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.450 Same 0.450