What is the news?

Ezra’s  4Q13  “reported”  net  profit  was  up  20.1%  yoy  to US$10.0mn  due  to  better  associates  performance,  while gross  margin  decreased  from  22.3%  in  4Q12  to  17.9%  in 4Q13 on higher subsea contributions where margin is lower. However,  adjusting  for  (i)  US$2.7mn  gain  on  dilution  of interest  in  associates,  (ii)  US$1.2mn  loss  on  disposal  of fixed  assets,  and  (iii)  US$2.7mn  on  preference  dividend, 4Q13 core net profit was c.US$5.8mn.

How do we view this?

Management’s  decision  to  incur  a  write-down  from  its Subsea  legacy  projects  in  3Q13  had  resulted  in  the company  posting  an  overall  loss  in  FY13.  However,  the turnaround of its Subsea division in 4Q13 saw overall gross margin improved significantly to 17.9% from 1.1% in 3Q13. That said, we remain cautious as we believe Ezra will need to show a series of good results to kick start a sustainable upward rerating of the stock.

Ezra is currently bidding for about US$8bn worth of projects, with  the  Subsea  division  tendering  ~US$5bn  worth  of contracts.  The  group  won  new  subsea  contracts  in  4Q13 worth  ~US$421mn.  Management  remains  positive  on  the outlook  for  subsea  market,  driven  by  deepwater development and more complex equipment.

Investment Actions?

We are lowering our FY14E earnings  estimates  for Ezra by 33%  on  more  conservative  subsea  margins.  Accordingly, we  introduced  FY15E  forecasts  and  rolled  over  our  target P/E.  Our  target  price  of  S$1.18  (from  S$1.00)  is  derived based on 13.0x FY15E P/E. Maintain Neutral.

Source: PhillipCapital Research - 28 Oct 2013