• Acquiring the entire share capital of Teras Conquest 4 to be paid with 18.3mn new Ezion shares.
• Increasing shareholding in JV, Kenai Offshore Ventures.
• Maintain "Accumulate” and TP of S$2.53.

Ezion  has  announced  that  it  will  (i)  acquire  the  entire  share  capital  of  Teras Conquest  4,  to  be  satisfied  by  the  issuance  of  18.4mn  new  Ezion  shares  at S$2.2407/share  (~1.5%  dilution  amounting  to  S$41.2mn),  and  (ii)  increase  its shareholding  in  associate,  Kenai  Offshore  Venture  (KOV),  for  US$23.95mn (~S$30.3mn) funded through internal resources.

How we view this

Acquisition of Teras Conquest 4: As a recap, Teras Conquest 4 was previously sold to a group of Global Investor Program (GIP) funds at US$78mn two years ago, for a sale and lease back arrangement. It is currently working in West Java Sea on a 6-year time charter contract (4 years remaining) for Pertamina. The rationale for this acquisition is to facilitate a flag change for this liftboat, in order to re-contract at a higher charter rate. Assuming no changes in contract rate, we estimate potential earnings contribution of US$4.8-5.4mn (~2% of FY14E PATMI). As such, we  view the equity dilution of 1.5% (on new shares) as neutral.

Raising stake in KOV: KOV (50:50 JV between Ezion and Australia-listed upstream player Buccaneer Energy) owns a jack-up unit currently providing drilling services in Cook Inlet off Alaska. As Buccaneer Energy is in need to raise capital for its main E&P activities, it is putting the 50% stake for sale at US$23.95mn. We estimate an increase in annual earnings contribution of ~US$3.8-4.1mn (slightly less than 2% of FY14E PATMI). Given the cash holdings on KOV (post transaction) of ~US$12mn (as per management), we estimate this would potentially accrue 31-34% ROE.

Investment Action

As the first-mover in Asia liftboat market, Ezion is always taking steps to maintain its competitive edge. We keep our  earnings estimates intact, as there is marginal impact  from  the  transactions.  Maintain  Accumulate  rating  and  target  price  of S$2.53, still based on SOTP valuation.

Source: Phillip Securities Research - 6 Jan 2014