• 2Q14 “recurring” net income rose 27% YoY on 37.8% topline growth and stronger margins.
• Bonus shares issuance with one bonus share for every five existing shares
• As a result of equity dilution post bonus issue, we expect our fair value estimate to fall from S$2.67 to S$2.22
• Maintain "Accumulate” with new TP of S$2.67.

What is the news?

Steady results

Ezion Holdings reported a 37.8% YoY increase in revenue to US$92.6m and a 25.5% rise in net profit to US$45.5m as chartering revenue grew with the deployment of additional units of Liftboats and Service Rigs. Gross profit margin improved to 51% from 46% a year ago due to higher contribution from Service Rigs & Liftboats relative to the offshore logistic support vessels businesses and the deployment of more bareboat charters. Net gearing fell to 0.98x as a result of the equity placement to strategic investor Tan Sri Quek Leng Chan (announced in May this year) and profits retained as no dividends were paid.

Bonus shares issuance

Ezion is proposing a bonus issue of new ordinary shares with one bonus share for every five existing ordinary shares. Based on 1,315 million issued shares as at 31 July 2014 morning, the company estimates 263 million bonus shares will be issued.

How do we view this

More units deployed in 2H14 should sustain earnings momentum

1H14 net profit at US$90.7m met about 47% of our full year estimates. Revenue and earnings growth in subsequent quarters should remain robust with 6 to 9 more units expected to begin contribution in 2H14 (There are currently 18 service rigs / liftboats in operation). Forward guidance provided by management remains positive with the increased focus on platform and well related work by the oil majors in Asia Pacific, Middle East and West Africa.

Increased trading liquidity and equity dilution post bonus issue

The rationale for the proposed bonus issue is to increase the accessibility of investing in the company for investors, thereby encouraging trading liquidity and greater participation by investors and broadening the shareholder base of the company. As a result of equity dilution post bonus issue, we expect our fair value estimate to fall from S$2.67 to S$2.22.

Investment Action

Taking into account the two new contracts announced in July and adjusting for delays in some projects (such as Liftboat Nora which is now expected to start work in 4Q14 instead of 3Q14) , we adjust our target price upwards from S$2.53 to S$2.67, based on SOTP valuation. Ezion is currently trading at 12.3x/8.1x FY14E/15E P/E. Maintain Accumulate. Key downside risks include (i) delays in vessel deliveries affecting earnings, (ii) weaker-than-expected order wins, (iii) competition from existing players and new entrants eroding profit margins.

Source: Phillip Securities Research - 5 Aug 2014