Ezra Holdings: Expect a better 2H

• One-off boost from associate’s disposal gain
• Offshore Support Services a drag
• Strong order book

2QFY14 PATMI boosted by one-off gain

Ezra Holdings reported a 22% YoY rise in revenue to US$300.4m and a 34% fall in net profit to US$19.6m in 2QFY14, such that 1HFY14 revenue of US$640.3m and net profit of US$25.9m formed 48% and 59% of our estimates, respectively. However, we note that earnings in 2QFY14 were aided by a US$16.6m gain on disposal from the sale and leaseback of Lewek Champion under EOC which boosted Ezra's „share of profit of associated companies‟ line item. Adjusting for this, we estimate core net profit to be about US$3m in the quarter and US$9.7m in 1HFY14, with the latter forming 28% of our FY14 core estimates.

Expecting turnaround in 2HFY14

Nevertheless, we expect 2HFY14 to improve sequentially, partly due to seasonal strength, in line with management‟s guidance. During 2QFY14, Ezra‟s Offshore Support Services (OSS) Division suffered due to unplanned maintenance schedules which resulted in larger-than-expected expenses. This consequently impacted its utilisation rates and gross margins (2QFY14: 13-15%). Management expects OSS gross margins to normalise to the high-teens level in 2H14. We also expect Ezra‟s Subsea Services Division to gain traction in 2HFY14 with a ramp up in the execution of projects. Hence, we are keeping our forecasts intact.

Share price has corrected sharply YTD, upgrade to HOLD

Ezra's order book remains above US$2.0b, with more than US$800m of orders secured since the start of FY14. It is bidding in excess of US$8b of subsea work, and has historically seen a win-rate of ~30%. Management is confident of bringing its subsea order backlog to above US$1.5b in 2014. It just won a LOA from Noble Energy for a subsea project in the Gulf of Mexico which will involve its flagship Lewek Constellation vessel. As for the stock, after dropping to a low of S$0.93 in early Feb this year, its price has recovered and has been within the range of S$1.05-S$1.10 so far this month (YTD still down 22%). Upgrade Ezra to HOLD, with a slightly higher fair value estimate of S$1.05 (prev. S$1.03) as we roll forward our valuations to 0.9x blended FY14/15F P/NTA.

Source: OCBC Research - 14 Apr 2014