Ezion gained another 1.7% yesterday, bringing the year to date gains to 6.8% in five trading days. This is a good start to 2014, especially when the STI is down 0.5% over the same period. Macquarie Equities Research released a research report on 3 Jan with an ‘Outperform’ rating on the counter and a 12-month price target of $2.55. Some excerpts from the report are shown below.

Event
Ezion’s focus on “growth and leverage” is clear as it started 2014 with two significant events. While Ezion added one new Self Elevating Unit (SEU) to its fleet through equity issuance, it increased stake in another SEU from 50% to 100% through cash.
 
Impact
What happened?:Two events:
Liftboat bought from “Teras Conquest” for US$32.5m: Teras Conquest is a Singapore incorporated company and owns only 1 Liftboat. Ezion has bought the company and is paying the US$32.5m through issuance of 18.4m new shares at S$2.24/share (1.5% dilution).
 
Moves to fully own “Service rig no.7” from owning 50% earlier: This service rig was 50:50 owned by Ezion and “Kenai Offshore Ventures”. Ezion has bought the rest 50% for US$23.95m in an all cash deal.
 
Positive / Negative?Positive for both:
Liftboat bought with decent returns and a back-up contract: The liftboat bought via Teras Conquest will return profit of US$4.8m annually and has a six-year contract running from Feb ’12-Jan ’18, thus generating annual return of equity (ROE) of 15%. Moreover, 1.5% equity dilution for funding implies no additional leverage burden.
 
Other 50% of Service rig bought at an attractive price and high ROE: The initial capex for this Service rig was US$100m. Thus, it seems that Ezion has paid only US$23.95m for the US$50m of capex that “Kenai Offshore” had invested initially. The Service rig has a contract running from Oct ’12-Sep ’17. The Service Rig makes an annual profit of US$13.4m, thus implying an extremely lucrative ROE of ~40%.
 
What’s the status of Ezion’s total SEU fleet now?  Ezion now has 30 SEUs in total – 13 Liftboats and 17 Service rigs. 24 out of 30 SEUs are fully owned.
 
MER’s earnings and target price revision
On the back of these events, MER is increasing 2013E profit estimate by 9%, 2014E profit estimate by 3.4%, and reducing 2015E profit estimate by 6.7%.
 
MER’s action and recommendation
Taking care of both – growth and leverage – while expanding profits: Ezion added 9 new SEUs in 2013 vs MER’s expectation of 12, which in return takes care of investors’ key concern – leverage. Through equity issuance and slowing pace of new contracts, Ezion has taken net debt/equity down to ~80% currently from 103% at end-3Q13, in MER’s view. MER expects fleet growth’s pace to reduce to only 6 new SEUs in 2014E, which will help leverage further, given 56% jump in profits and 54% jump in free cashflow (FCF) that MER expects in 2014E.

Source: Macquarie Research - 9 Jan 2014