Yesterday, Ezion Holdings resumed trading from its morning halt after announcing another Self Elevating Units (SEU) contract (liftboat) for US$82.1m. Including this, Ezion has now won 6 new SEU contracts in 2013 year to date.

Macquarie Equities Research (MER) published a research note shortly after the announcement with further details of the contract win:

Details of the contract:

• Buyer - Unnamed ASEAN National Oil Company - Repeat customer
• Contract value  - US$82.1m
• Time period- 5 years (3 plus 1 plus 1)
• Type- Bareboat
• Delivery- 1Q15
• Payment - 20:80 (20 pct payment to be received upfront)
• Cost (Capex) - US$60m (all inclusive)
• Funding- US$45m (75% of CAPEX loan secured. Rest US$15m to be funded by issuance of preference shares.
• Additonal info from management- Negotiations are on to convert the contract into a "time-charter" (where Ezion will supply marine crew to operate the liftboat). If it is done, the contract value will rise to US$90m for 5 years (US$18m/year).

 Unique equity raising: Ezion is raising S$30m through issuance of redeemable preference shares. Details:

• Investors- Very long term holders under the Global Investment Program (GIP) in Singapore - Evia and Venstar Investments. Venstar is an existing investor.
• Time period- 3 years
• Convertible- 50% between 1-3 years; Other 50% between 2-3 years
• Equity dilution- 1.43%
• Dividend- 3% one time pay off on conversion; 5% annual dividend but to be paid only to investors who hold the shares for more than 3 years

One new contract per month run-rate continues: Ezion now has 27 SEUs in total (12 liftboats and 15 service rigs). Gearing is in check at around 1.1x net debt / equity. MER expects 6 more new contract announcements in the rest of 2013.
 
A highly profitable contract with annual profit in the range of US$8-10m and ROE of more than 50%: Given the 75% debt funding (at around 4% interest rate) and the unique 25% financing through equity raising which would cost nothing to start with, Ezion is set to make more than 50% ROE on this contract according to MER’s analysis. If it's a timer charter, Ezion will make US$18m/year revenue on this contract less US$5m (maximum) opex, less US$2.5m depreciation and US$2.1m interest cost, according to MER’s analysis.

MER’s action and recommendation
Management has become financially savvy; financing of every new liftboat is being diligently taken care of: The last contract in May was 100% debt financed. This one has been uniquely financed again. Management is doing its best to generate high returns on every contract, while keeping the balance sheet from getting extra stretched, in MER’s view.

Street may upgrade 2014E and 2015E estimates again; Stock should inch up: MER is 11% and 22% ahead of consensus for 2014E and 2015E respectively. MER believes the street likes to be conservative on its new SEU contract estimates and upgrades estimates every time Ezion announces a contract. The trend should continue in 2H13 in MER’s view.
 
MER has an Outperform rating on Ezion with a 12-month target price of $3.05.

Source: Macquarie Research - 19 Jul 2013