Ezion Holdings - DBS Research 2018-11-12: Utilisation Set To Rise

EZION HOLDINGS LIMITED (SGX:5ME)

Ezion Holdings - Utilisation Set To Rise

Ezion's 3Q18 revenue bucked declining trend; core net losses narrowed sequentially.
Liftboat utilisation to rise from 42% to 75% by end-4Q.
Enquiry levels have gone up though rates remain competitive.
Maintain BUY; Target Price reduced to S$0.14.

BUY; Target Price reduced to S$0.14, after earnings revisions, based on a lower target multiple of 0.8x on FY18 book value (vs 10x previously), given the slower-than-expected ramp up in utilisation and revenue. This is in line with valuation of SGX-listed peer PACC Offshore (POSH, SGX:U6C).

We expect losses to narrow in 4Q18 and earnings to move back into the black in 2019. We hold on to our belief that Ezion is set on a recovery path:
1. improving utilisation and day rates to drive an earnings recovery; and
2. strategic partnership with China Merchant Group which brightens 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.

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.

We value Ezion based on 0.8x FY18 book value, in line with the valuation multiple ascribed to SGX-listed peer PACC Offshore (POSH, SGX:U6C), arriving at a target price of S$ 0.14.
Our FY18F book value has factored in ~US$1.1bn total impairments made in 2015-2017. We assume full conversion and exercise of bondholders’ warrants in 2020.

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 risk to our earnings forecasts.

Revenue rose c.20% q-o-q to US$28m in 3Q18 as an additional jackup rig had secured a 90-day job during the quarter and several tug and barges were put to work as well.

Though we had expected a faster pace of improvement, additional mobilisation cost of ~US$2m was incurred in the quarter. Forex gain was negligible at a mere US$25k during the quarter.

Operating cash flow declined from the US$15-20m in the last few quarters range to only < US$6m. We understand that there were higher payments made to suppliers during the quarter in preparation for delivery of four liftboats in 4Q18.

For liftboats, 5 units were working in 3Q, one unit was offhire for a special survey while another unit came online. Ezion is expected to deploy 2 liftboats to Nigeria and another 2 to Middle East in 4Q18, bring its operating liftboat fleet to 9 units. These units are largely on 1-2 year contracts. Rates are relatively better in Nigeria. This should bring liftboat utilisation from 42% to 75%. The remaining three units should commence work next year.
For jackups, utilisation remains low at 20-25% with 4 out of 16 units working during the quarter with one jackup rig employed for < 90-day job in the North Sea. The unit has since offhire. Ezion will likely deliver a jackup rig for ONGC in 4Q18 to commence on a 3-year bareboat contract at relatively low day rates to reduce burn rate.

We have pushed back earnings turnaround to 2019. Ezion recorded core losses (ex forex) of ~US$60m in 9M18. We expect 4Q18 to record a narrower loss of ~US$15m as most of new units will be contributing towards end of the year.
We have lowered our FY19F earnings from US$21m to US$10m after factoring in higher interest expense and operating cost.
Our Target Price is reduced to S$0.14, pegged to a lower 0.8x P/BV (vs 1.0x previously) in view of the slower pace of recovery. This is in line with the valuation of SGX-listed peer PACC Offshore (POSH, SGX:U6C)’s target multiple.

Pei Hwa HO CFA DBS Group Research | https://www.dbsvickers.com/ 2018-11-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.14 DOWN 0.210