• Strong topline growth (+22% yoy) driven by higher subsea contribution.
• Robust order book (>US$2.0bn) provides high revenue visibility.
• Maintain Neutral with new TP of S$1.09.

What’s new?

Ezra announced 2Q14 ‘reported’ net profit of US$19.6mn (-34% yoy). Adjusting for US$16.6mn one-off gain from associate, EOC Limited, resulting from the sale and leaseback of Lewek Champion, 2Q14 earnings saw a net profit of ~US$3.0mn. 2Q14 sales rose by 22% yoy to US$300mn, mainly driven by higher subsea business contribution. Albeit overall gross margin decreased from 17.1% in 2Q13 to 15.9% in 2Q14, it was higher than the 14.9% in 1Q14.

How we view this

While 1H14 sales of US$640mn (+22% yoy) was 44%/43% of PSR/consensus forecast, 1H14 ‘recurring’ net profit of US$6.9mn (before perpetual dividend) was 15%/14% of PSR/consensus forecast. We expect stronger performance in 2H14 due to seasonality of its subsea business.

Subsea fleet utilization has improved steadily on a yoy basis from 64% in 1H13 to 78% in 1H14, due to effective deployment of subsea vessels globally through the winter period. For Offshore support services (EMAS Marine) division, 1H14 performance was weak due to higher operating costs and lower utilization of AHT segment in 2Q14.

Albeit long-term fundamentals for the subsea market remains robust, outlook remains muted in the near-term. In fact, Subsea 7 (one of the top 3 subsea players) expects delays in project awards to remain a feature of the subsea industry in 2014, driven by clients’ capex constraints. Ezra secured >US$800mn new orders for Subsea and OSV since the start of FY14. Ezra’s total order backlog currently exceeds US$2.0bn, with subsea order backlog accounting for more than half of its total order book, now standing at >US$1.4bn.

Investment Action

We cut our FY14E/15E earnings estimates by 7%/6% to factor in the 1H14 results. Hence, our target price is reduced to S$1.09, still based on 13x FY15E P/E. We maintain our Neutral rating. Key upside risks include substantial improvement in subsea execution/profitability, stronger-than-expected new order wins. Key downside risks include a prolonged downtrend in oil prices affecting E&P appetite, weaker-than-expected subsea execution/margins.

Source: Phillip Securities Research - 14 Apr 2014