Ezion Holdings - DBS Research 2018-05-14: Bottom-fishing Opportunity

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EZION HOLDINGS LIMITED SGX: 5ME

Ezion Holdings - Bottom-fishing Opportunity

• Ezion's 1Q18 core net loss of ~US$15m was expected. 
• Gradual recovery from 3Q with higher utilisation. 
• Unusual price movement with high trading volume post trading resumption is unjustified on fundamentals. 
• Reiterate BUY; Target Price unchanged at S$0.29.

BUY; Target Price S$ 0.29 based on 1.4x FY18 book value.

• Ezion’s sell-off since resumption of trading is unwarranted. We hold on to our view that Ezion is poised to re-rate from its current low valuation (which reflects insolvency), catalysed by:
  1. successful refinancing exercise which provides a 6-year runway;
  2. improving utilisation and day rates driving an earnings recovery;
  3. Temasek-linked Pavilion Capital as strategic investor boosts confidence; and
  4. potential strategic partners to brighten growth prospects. 

Strategic industrial partners on the way?

• Ezion remains in talks with strategic partners that could offer financial support or liftboat assets to tap the demand recovery. We believe potential tie-ups with prominent industry players enhances Ezion’s growth prospects, which would otherwise be constrained by its high gearing level. This serves as a catalyst for further re-rating. 

Where we differ.

• We are more hopeful on Ezion’s turnaround. While it has also been hit hard by the recent oil crisis, Ezion is among the few surviving players with a niche competitive edge in liftboats, a segment with brighter demand/supply outlook relative to other offshore support vessels. 

Valuation: 

• We value Ezion based on 1.4x FY18 book value, in line with the valuation multiple ascribed to SGX-listed peer PACC Offshore (POSH) post massive impairments, arriving at a target price of S$ 0.29. 
• Our FY18F book value has factored in ~US$1.1bn total impairments made in 2015-2017 and assumes full conversion and exercise of bondholders’ warrants. 

Key Risks to Our View: 

• Slower recovery. Drop in oil price below US$50/bbl may hit O&G activities, and thus drag demand and day rates improvement for liftboats. This poses downside risks to our earnings forecasts. 

WHAT’S NEW - 1Q18 losses expected

Excluding one-off, net loss was ~US$15m in 1Q18.

• Headline net loss of US$46.4m comprises one-off expenses and losses totaling ~US$22m including:
  • remaining professional fees (US$6m in 1Q18, in addition to US$26m incurred in 4Q17) for the restructuring exercise, which was completed in Apr- 2018;
  • consent fee (US$13m); and
  • loss on disposal of tug & barges (US$3m).
• Stripping the US$22m one-off and forex loss of ~US$10m, core net loss was ~US$15m in 1Q18, narrower from ~US$17m recorded last quarter despite lower revenue largely aided by depreciation savings of US$13m post impairment.

Revenue declined q-o-q due to off-hire.

• Revenue dropped 15% q-o-q as one service rig was offhire for redeployment in 1Q18. The unit will likely resume operations in 3Q18.

Interest savings kicking in 2Q18.

• We expect ~US$2m / quarter interest savings post refinancing exercise completed in Apr-2018.

Higher utilisation and charter rates are key.

• Ezion will have to demonstrate improvement in utilisation and grow revenue in coming quarters. The effect of charter rate increase will likely translate to higher margins towards 4Q18 upon recontractings.
• To rehash, the liftboat fleet of 12 units is c.70% utilised (additional 2 units to be delivered by end of the year and 1H19) while only ~40% of the jackup fleet of 18 rigs are chartered.

Awaiting industrial strategic partner.

• The potential partnership with subsidiaries of China Merchant Group is a key catalyst that will drive the future growth of Ezion without adding more burden to its balance sheet.

Positive operating cash flow.

• On a positive note, Ezion churned positive operating cash flow of US$13.1m in 1Q18. Net gearing was lifted further to 5.4x due to net losses pressing down book value to US$250.8m, from US$304.8m a quarter ago.

Book value lifted by bond conversion.

• As of 9-May, 39% of convertible bonds and 60% of convertible PERPs have exercised the conversion. This has resulted in issuance of 813m new shares. This will transfer ~US$100m debt to equity. In addition, there is also an equity injection from strategic investors as well as new shares issued for professional fees and consent fees of ~US$60m in total. These will lower net gearing from 5.4x to 3.2x.
• (Please click on the link to Ezion’s official website for bond conversion status)

What caused the price weakness?

• Ezion’s share price has trended down since the lifting of share trading suspension on 17th Apr. There was selling pressure as:
  1. Prudential - M&G was pairing down its stake to below its original stake of 5.65% or 132m shares
  2. We surmise some stakeholders may have cashed out at a loss. As of 9 May, approximately 44% or 813m shares issued from bondholders’ conversion.
• Still, Ezion’s trading volume has been overwhelmingly high with > 2.4bn shares or ~138m shares/day transacted since resumption of trading. With the successful restructuring, improving outlook and strategic shareholders coming in above 20Scts, we did not expect the stock to be sold down to 0.5x impaired book value.
• Ezion had put out a clarification on 30 Apr that the company is not aware of any development that may contribute to the unusual share price movement and "draw attention to the Securities and Futures Act which prohibits market manipulation...."

Pei Hwa HO CFA DBS Vickers | https://www.dbsvickers.com/ 2018-05-14

SGX Stock Analyst Report BUY Maintain BUY 0.290 Same 0.290