Ezion Holdings - OCBC Investment 2017-05-12: Seeking Clarity For 2H17

Ezion Holdings - OCBC Investment 2017-05-12: SEEKING CLARITY FOR 2H17 EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - SEEKING CLARITY FOR 2H17

  • Weaker than expected results.
  • 2Q to remain lacklustre.
  • Operating environment still tough.

Soft 1Q17 results 

  • Ezion Holdings reported a 16.4% YoY fall in revenue to US$68.6m and a net loss of US$12.7m in 1Q17, due to lower gross profit margin of 12.8% in the quarter, as well as US$13.3m net forex loss as warned in the group’s earlier profit guidance. 
  • The strengthening of the SGD against the USD resulted in forex losses on the group’s notes payable. Excluding one-off items, we estimate core net profit of about US$0.5m in 1Q17. 
  • Gross profit margin was lower than expected as two units that were scheduled to be deployed did not do so, while one unit was taken out of the working fleet in the quarter.

2Q17 earnings likely to remain lacklustre

  • The operating environment in the marine and offshore oil and gas industry remains very challenging. We understand that a Chinese subcontractor that Ezion engaged and paid did not pay the equipment supplier as promised, due to cashflow problems of the subcontractor. The amount involved is less than US$2m. 
  • We do not expect charter rates to recover significantly, though management is seeking to improve utilisation rates for its fleet in 2H17. 
  • Ezion is also working with potential partners on co-ownership of some assets, though the current environment has made securing new financing for purchase of assets more difficult.

Sentiment in sector to be tested again 

  • Ezion is in the process of attempting to put more assets into work through modification and upgrading or through new service rigs, and will endeavour to match the capital expenditure to its cashflow. 
  • The operating environment remains tough and it may take some time before a significant recovery can be seen, barring a sudden spike in oil prices. 
  • On the downside, there could be a few more listed companies facing difficulties in repaying their bonds this year, which may affect sentiment and the ease of securing financing for companies in the sector. 
  • Taking these into account, we lower our P/B from 0.6x to 0.35x, such that our fair value estimate drops from S$0.54 to S$0.32. 
  • Downgrade to HOLD.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-05-12
OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 0.32 Down 0.540