Ezion Holdings reported robust profit growth of S$45.2m for its first quarter 2014 (1Q14) results yesterday, a 60% increase from its 1Q13 recurring profit of S$28.3m. Macquarie Equities Research (MER) released a research report yesterday evening analysing Ezion’s earnings result and concluding with an ‘Outperform’ rating on the stock. Some excerpts from the report are shown below.

Impact
The Good
Revenues continue to jump as more vessels are delivered: Ezion delivered 3 new vessels in the quarter, thus leading to a 72% YoY and 13% quarter on quarter (QoQ) jump in revenues. Ezion has 24 working vessels now (34 in order book).
 
High growth not coming at the expense of margins:  Earnings before interest, tax, depreciation and amortization (EBITDA) margins expanded further to 69.7% in 1Q14 versus 55.1% last year. There has been a sequential improvement in margin over last five quarters despite the sequentially higher revenue growth, thus indicating accretive return on equity per vessel.
 
Profit growth tracking MER’s full year estimate: 60% profit growth is tracking MER’s 62% full year 2014 growth estimate.
 
The Bad
Interest and depreciation costs increase: Both costs increased substantially, in line with the fleet growth, as a function of the business model.
 
Looking forward
10 out of the current 34 fleet haven’t even contributed to revenues:  Almost 1/3^rd of Ezion’s fleet hasn’t contributed to revenues, free cash flow or profits until now. As these vessels are delivered, sequential jump will continue in MER’s view.
 
Recent equity infusion a shot in the arm: Recent 7% stake sale to a Malaysian investor was a shot in the arm for Ezion as it took away the overhang of regular minor funding requirements for the next 12-24 months.
 
Robust cash flow growth and this equity raising can fund growth for 2 more years: Robust increase in gross cash flow to US$528m by 2015E vs only US$137m in 2013 and recent equity funding will take care of fleet expansion, in MER’s view.
 
MER’s action and recommendation
Upside risk of 10-15% to street’s 2015 and 2016 profit estimates:  MER believes the street is still sitting conservative on ‘new contract wins’ for Ezion in 2014. If the street brings its estimates closer to MER’s estimate of 12 new wins in 2014 and 8 new wins in 2015, there is strong upside risk.
 
Given robust profit, multiples should compress faster than expected:  At 7.7x 2015E P/E and 1.5x P/B with ~22% ROEs, the stock looks very attractive at current levels, in MER’s view.
 
MER has an Outperform rating on Ezion with a 12-month price target of S$3.00.

Source: Macquarie Research - 8 May 2014