Ezion Holdings - CIMB Research 2017-05-14: 1Q17 On Shaky Terrain

EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - 1Q17 On Shaky Terrain

1Q17 core net profit (pre-perps) of US$0.5m was a big miss vs. our/consensus expectations (US$41m/US$44m).
Reported loss of US$12.7m was mainly due to forex losses on unsecured bonds with depreciation of US$/SG$.
Elusive pick-up in GPM and JV/associate contributions (on one-off dry-docking expenses by an associate) widened the negative variance to our estimates.

Given the weak 1Q17 and weak outlook, we cut FY17-19F EPS by 40.5-76.6%
Downgrade to REDUCE (from ADD) at TP of S$0.26. While stock is trading at trough valuations, we expect investors to shy away until quarterly figures improve.

1Q17 revenue of US$68.6m (-16.4% yoy; -5.6% qoq) continued to slide as one more unit became un-deployed in 1Q17. Ezion said 14 units were operating in 1Q17 (vs. 4Q16:15), as another vessel contract failed to be extended.
GPM margins stagnated at 12.8% pressured by depreciation and maintenance of unchartered vessels.
A foreign exchange loss of US$13.7m on Group’s Note Payables was due to the appreciation of SG$ vs. US$, which led to the reported net loss of US$12.7m.

Management reduced guided fleet deployment to 16 units by 1H17 and 21 by end-17 (from 18 and 22 previously) as Ezion continues to see delays in delivery to clients who opt to postpone maintenance schedules given the uncertain market conditions.
Moreover, it faced some hiccups with one of its subcontractors (which are purportedly facing financial difficulties) for a Chinese unit that it is currently refurbishing, leading to delays in its deployment which is now expected within 2H17.

We initially expected sequential financial improvement in 2017, with vessel deployments picking-up and non-recurrent non-chargeable refurbishment and mobilisation costs. However, management’s negative undertone suggests otherwise.
We have reduced our FY17-19F EPS by 40.5-76.6% with main cuts largely driven by lower FY17/18/19F GP margins of 17.2%/19.9%/21.2% (vs. 23.4%/23.1%/24.2%).
We have also cut our FY17- 19F revenue by 19.7-21.8% as we were previously over optimistic on DCRs.

Ezion reported operational cashflow of US$26.0m and cash position of US$187m in 1Q17, which we believe is sufficient to cover capex needs of US$100m. Moreover negotiated debt repayment based on received operational cashflows could alleviate near-term concerns. However, FY18-19F could be real going concern issue if vessel count does not improve as Ezion has bond redemptions of US$42m/113m respectively.
Also, if conditions do not improve we expect more impairment risks emerging.

We downgrade our call on the stock to REDUCE (from ADD) and cut our TP to S$0.26 (from S$0.45), based on FY17F P/BV of 0.3x (from 0.5x previously).
Our valuations represent a 50% discount to the -1 s.d. level of 0.6x given management’s negative undertone.
While the stock is currently trading at trough valuations of 0.35x, we foresee investors shying away until quarterly figures improve.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-05-14

CIMB Research SGX Stock Analyst Report REDUCE Downgrade ADD 0.26 Down 0.450