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

EZION HOLDINGS LIMITED (SGX:5ME) | SGinvestors.io 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

  • 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.


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.


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 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.


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 risk to our earnings forecasts.


WHAT’S NEW - Revenue bottoming out


Revenue in 3Q18 bucked the declining trend.

  • 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.

Core losses (excl. forex and one off) narrowed from US$24m in 2Q18 to US$21.4m this quarter.

  • 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

  • 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.

Utilisation to improve 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.


Earnings revisions.

  • 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



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