• US$68m of other income in 1Q
• Drag from subsea
• Waiting for sustained core earnings

1QFY15 results boosted by one-off items

Ezra Holdings reported a 6% YoY fall in revenue to US$321.0m and a 23% drop in gross profit to US$39.1m in 1QFY15. However, the group saw other income of US$67.5m which boosted net profit to US$54.4m in the quarter, compared to US$6.3m in 1QFY14. Due to the consolidation of EMAS Marine into EOC, there was a US$106.3m gain on bargain purchase from the acquisition of subsidiaries, offset by loss on step-up of associated and JVs to subsidiaries of US$42.3m. There was also impairment of fixed assets of US$10m. Stripping out one-off items, we estimate core net loss of about US$13m, a disappointing development.

Subsea main reason for weaker performance

In 1QFY15, subsea was the main drag, due to 1) a mandatory drydock of Lewek Express for the entire quarter, 2) unexpected repair work for Lewek Champion due to a gangway malfunction, and 3) fewer variation orders. This resulted in only 7-8% of gross profit margin for subsea. Meanwhile, on the Offshore Support and Production Services side, there was also weakness in shallow water PSVs.

Secures A$130m contract from Apache

On a more positive note, the group’s subsea division has secured a contract from Apache Energy in Australia worth more than A$130m, and this will involve the soon-tobe-completed Lewek Constellation. Excluding US$511m of backlog from the two FPSOs, the group has an outstanding backlog of US$2b, and management says that current tendering activities remain robust.

Waiting for sustained core earnings

Currently, management sees a low probability of contracts in its order book being cancelled, as almost all have started work. We believe, however, that there could be pricing pressure ahead due to the competitive environment, and if oil prices remain subdued for a prolonged period, there would be an impact on new tenders awarded. Due to volatile core earnings, we are sticking to our P/B valuation but lowering our peg from 0.5x to 0.4x in light of the challenging environment and de-rating of the broader sector. This lowers our fair value estimate from S$0.77 to S$0.60. Maintain HOLD.

Source: OCBC Research - 12 Jan 2015