Yesterday, Ezion Holdings resumed trading after a three-day halt to gain 1.4%. The company which had reported its highest ever quarterly profit just last Thursday, announced two separate pieces of news:1) undertaking of an 8% stake in major builder of liftboats Triyards and 2) sales of its offshore logistics business.

In a research report released yesterday, Macquarie Equities Research (MER) said that with 30-50% earnings growth in the next 2 years and the stock at 6 times its 1-year fwd price-to-earnings ratio, Ezion is their top pick in the offshore and marine sector now.

Read on for MER’s analysis of Ezion and why they think it is a deep value buy...
 
First strategic move – 8% stake in Triyards
Ezion has taken an 8.33% stake in Triyardsat an 18% premium to yesterday’s closing market price. MER believes this is a significantly positive strategic move to take control of the shipyard in which Ezion builds most of its liftboats.
 
-  Move to fend off future competition: Triyards is a major builder of liftboats. By taking a stake, Ezion will get a say in what orders it wants to take in the yard. Ezion can ring-fence itself from future orders from competitive contractors in our view.
 
- Stake could be increased to take control in the future: MER thinks Ezion could increase its stake in the shipyard as it moves forward, especially after getting funding lines opened from a large Malaysian private equity investor at the start of 2014.
 
- Could patent future liftboat designs: MER also believes that Ezion could start patenting most of its liftboat designs at Triyards and decide who the end user would be.
 
- Profits from Triyards to come as ‘associate profits’: Ezion’s group profits would be lifted by the contribution of Triyards going forward. Triyards had reported S$27mn profit in full year 2014.
 
Second strategic move – sale of ‘Offshore logistics’ business
Ezion used to make 100% of its profits from the offshore logistics business until 2009 and has gradually moved towards liftboats in the last 5 years. Offshore logistics contributes around 10% to Ezion’s group profits today and management had indicated in the past its desire to sell off that entire business. In line with the strategy, Ezion offloaded its stake in the offshore logistics business to Ausgroup. Ezion has now become a pure liftboat player.
 
MER’s action and recommendation
A deep value buy at 6x P/E, 1.2x P/B with 23% ROE: MER does not see any downside risk to Ezion’s earnings unlike many other of its peers in the Singapore offshore and marine space. With these strategic moves, MER believes Ezion’s growth outlook only gets stronger, and  thus sees deep value in the stock at current levels.
 
MER has an Outperform rating on Ezion and a 12-month target price of $2.40 based on a discounted cash flow methodology.

Source: Macquarie Research - 12 Nov 2014