Ezion Holdings - DBS Research 2018-08-10: Look Forward To Better 2H

SGinvestors.io

EZION HOLDINGS LIMITED SGX:5ME

Ezion Holdings - Look Forward To Better 2h

• Ezion Holdings’ 2Q18 core operating losses widened as revenue continued to slide; bottomline back to positive territory on fair value gains. 
• Gradual recovery from 3Q18 on higher utilisation. 
• Strategic partnership with China Merchant firmed up. 
• Reiterate BUY; Target Price S$0.21. 

BUY; Target Price reduced to S$ 0.21

• BUY; Target Price reduced to S$ 0.21 based on a lower target multiple of 1.0x on FY18 book value (vs 1.4x previously), given the slower-than-expected ramp up in utilisation and revenue. We now expect losses to narrow in 2H18 and move back into the black in 2019.
• Nevertheless, we hold on to our belief that Ezion is poised to re-rate, catalysed by:
  1. improving utilisation and day rates driving an earnings recovery; and
  2. strategic partnership with China Merchant Group which brightens growth prospects.

~ SGinvestors.io ~ Where SG investors share

Strategic tie-up with China Merchant enhances growth prospects.

• Ezion has formed a joint venture (JV) with China Merchant Group’s 52%-owned subsidiary TSC Group to cooperate in the ownership and operations of liftboats. 
• We believe such 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 1.0x FY18 book value, in line with the valuation multiple ascribed to SGX-listed peer PACC Offshore (POSH), arriving at a target price of S$0.21. 
• 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 for liftboats. This poses downside risks to our earnings forecasts.

WHAT’S NEW - 2Q18 boosted by fair value gains

Excluding fair value and forex gains, core net loss expanded to US$24m in 2Q18, from ~US$15m a quarter ago, as utilisation and revenue continued to slide.

• Ezion reported headline net profit of S$87m, boosted by fair value gains arising from refinancing exercise that totaled S$91m and forex gains of S$21m on the back of a strengthening USD.
• Excluding these, core net losses was ~US$25m, which was wider from~US$15m in 1Q18, on 39% q-o-q decline in revenue as two liftboats in the Middle East were offhire in the quarter.

Higher utilisation and charter rates are key.

• Utilisation of the total liftboat fleet of 12 units (additional 1 unit to be delivered by 2019) declined from ~60% in 1Q to ~45% in 2Q while total jackup fleet of 16 rigs saw a drop from ~30% to ~20%.
• Ezion will have to demonstrate improvement in utilisation and grow revenue in coming quarters. The effect of charter rate increases will likely translate to higher margins towards 4Q18 upon recontractings.

Liftboat operating fleet to increase from 2Q’s 5 units to 9 units by end of the year.

• The two off-hires are expected to resume operations in 3Q18 and two other liftboats currently at shipyards are scheduled to come online by 4Q18, bringing operating fleet to 9 units, implying 75% utilization rate.

Positive operating cash flow.

• On a positive note, Ezion’s positive operating cash flow rose from US$13.1m (1Q18) to US$18m this quarter. Net gearing has also reduced from 5.4x in 1Q18 to 2.7x on the back of bond conversions.

Book value lifted by bond conversion.

• As at 13-June-2018, c.69% of convertible bonds & PERPs has been converted. This has resulted in issuance of 1,259.8m new shares. This will transfer ~US$160m debt to equity. 
• The outstanding S$139.2m convertible bonds and PERPs, if converted, will increase issued shares by c.504m or ~14%, reducing net gearing to 2.1x.

JV with China Merchant’s subsidiary formalised.

• On 5 July, Ezion announced that it has formed a joint venture (JV) with China Merchant Group’s 52%-owned subsidiary TSC Group to cooperate in the ownership and operations of liftboats. China Merchant will inject liftboat assets to the JV (largely funded by China Merchant) and Ezion will bareboat charter the asset from the JV and earn a spread for operating the unit. 
• We expect 1-2 units liftboat contracts in near future. The potential partnership with subsidiaries of China Merchant Group is a key catalyst that should drive the future growth of Ezion without adding more burden to its balance sheet.

Earnings revisions.

• We have raised our FY18F earnings (from US$7m to US$33m) to reflect the fair value gains.
• Operationally, we have pushed back earnings turnaround to 2019. Ezion recorded core losses of US$28m in 1H18. We now expect losses to continue in 2H18 given the slow utilisation ramp up, leading to core net losses of US$37m in 2018.
• We have lowered our FY19F earnings from US$58m to US$21m after reducing our charter rate expectation for liftboats from US$42k/day to US$39k/day for 2019, and removing contribution from the liftboat that was capsized during tow in South China Sea in June.
• Our Target Price is reduced to S$0.21, pegged to a lower 1x P/BV (vs 1.4x previously) in view of the slower pace of recovery. This is in line with SGX-listed peer PACC Offshore (POSH)’s target multiple.

Pei Hwa HO CFA DBS Group Research | https://www.dbsvickers.com/ 2018-08-10

SGX Stock Analyst Report BUY Maintain BUY 0.21 Down 0.290