Ezion Holdings - CIMB Research 2017-08-14: 2Q17 Debt Reforms Ahead, Uncertainties Aplenty

Ezion Holdings - CIMB Research 2017-08-14: 2Q17: Debt Reforms Ahead, Uncertainties Aplenty EZION HOLDINGS LIMITED 5ME.SI

Ezion Holdings - 2Q17: Debt Reforms Ahead, Uncertainties Aplenty

  • Ezion's 1H17 core net loss (pre-perpetuals) of US$5.9m was a big sequential miss vs. our and Bloomberg consensus expectations (US$9.6m/US$15.0m).
  • Ezion’s proposed discussions with bank lenders and creditors took us by surprise, and places it in a highly uncertain situation, in our view.
  • No timeline given for the debt reform. Stock remains on trading suspension until further notice.
  • Maintain Reduce with a lower TP of S$0.13.

GP margin narrows; associates/JVs report losses 

  • Ezion's 2Q17 core loss of US$7.4m was a big disappointment. While its number of utilised vessels stayed at an average of 14 in 2Q17 (1Q17: 14), GP margin was down to 9.9% (2Q16: 21.3%, 1Q17: 12.8%) due to mobilisation costs for a vessel heading to China, additional expenses for two unchartered vessels received, and a slide in daily charter rates for one existing vessel in 2Q17. 
  • Another downer was losses from its associates/JV due to additional provisions for a unit owned by a JV.

Lower cash pile and negative operating cashflow 

  • Ezion’s cash pile declined to US$93.5m as at end-2Q17 (vs. US$186.9m as at end- 1Q17) due to c.US$30m capex spent on refurbishment of assets to be mobilised and c.US$60m debt repayment. 
  • It also reported it’s a negative operating cashflow of US$2.4m. Consequently, net gearing rose to 1.13x (1Q17: 1.09x).

Debt reform discussions to be initiated 

  • Management guided that a depressed charter rate environment is likely to continue in the next 12 months as O&G opex spend is still lacking. Furthermore, it has met resistance from financial institutions in its funding talks for six vessels it aims to deploy (it guides for a utilised fleet of 20/21 by end-FY17); this could cap profitability improvements in 2H17, in our view. 
  • Given the dire situation, it intends to engage all its bank lenders and creditors to reform its financing structure. Ezion did not rule out a potential impairment exercise.

Surprised by debt reform exercise 

  • We were surprised by the news that Ezion is looking to restructure its debt of US$1.48bn soon as it
    1. had in Feb 17 already negotiated for lower annual debt repayments that match its operational cashflows;
    2. had sufficient cash of US$186.9m (at end-17) to cover the 1st tranche of bonds due in FY18F; and
    3. was still operational cashflow positive at end-1Q17.

In a highly uncertain position 

  • Management gave no timeline for this exercise, but we understand it will engage the financial institutions within the week. Post that, we foresee informal talks initiated with its bondholders. There may be certain clauses requiring Ezion to engage the bondholders at a certain period, in our view. 
  • We believe Ezion's debt reform would be complicated, tedious and lengthy, and hence will place the company in a highly uncertain situation.
  • Trading of the stock is suspended until further notice.

Maintain Reduce, TP of S$0.13 

  • We slash our core FY17-19F EPS by 89.6%/54.2%/61.2% to reflect lower average fleet of 13/18/20 (from 13/18/23), GP margins and share of associates. However, we caution that these forecasts are highly uncertain given the recent developments. 
  • We keep our Reduce call and lower our TP to S$0.13 (vs. S$0.26 previously), based on a lower 12- month rolling P/BV of 0.15x (from 0.3x) as we ascribe a higher discount of 75% on -1 s.d. of 0.6x to account for the heightened risks. 
  • Key upside risk: successful debt reform.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-08-14
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.13 Down 0.260