Dropping 24% in four days, offshore and marine play Ezion Holdings is trading at its lowest in almost three years and, in Macquarie Equities Research’s (MER) view, it is pricing in a ‘doomsday’ scenario. While Ezion’s share price tumble has come on the back of poor second quarter earnings which missed street estimates and a weak oil environment, MER believes that the stock is now trading at extremely cheap levels and sees upside of almost 160%...
 
Here are excerpts from the MER report published on 14 August 2015 after Ezion reported their second quarter results:


Event
Ezion reported S$29m in the second quarter of 2015 (2Q15) versus S$41m in 1Q15, missing MER estimates by 30%. The miss was due to the highest costs on new deliveries while they did not contribute to revenues.
 
Valuation at 0.6x price-to-book is pricing in a ‘doomsday’ scenario in MER’s view while its core business is very firm in a turbulent environment. All of its 37 vessels are contracted with none being cancelled despite weak oil environment.
 

Results’ highlights
Revenues flat QoQ but costs increase = profit decline quarter-on-quarter (QoQ): Ezion delivered 3 new vessels in 2Q15 thus increasing its cost of goods by 36% QoQ, depreciation by 11% QoQ and interest cost by 21% QoQ.
 
Why were revenues flat despite 3 new deliveries?: Firstly, 2 out of the 3 vessels were delivered only in May 2015, thus adding only one month of revenues. Secondly, Ezion had 7 units which were switched around from one geography to another – thus resulting in idle time and zero revenues.
 
Vessel status – 22 delivered, 15 to go: Out of these 15, 6 will be delivered from Sep-Dec 2015 according to mgt, while the rest 9 will be delivered in 2016.
 
Re-contracting status – 4 out of 5 done: Out of the 5 vessels expiring this year, 4 have already been re-negotiated and re-contracted. Only 1 is due which is in the North Sea, for which negotiations are on, according to management.
 
 
Looking forward:
Quite remarkable to maintain QoQ revenues despite the movements: MER thinks Ezion has done extremely well to maintain revenues QoQ. Switching around of vessels and upgrade jobs at own costs are realities in an oil downcycle environment in MER’s view, with which Ezion has dealt very well.
 
2H15 revenues to improve sequentially with recent and more deliveries: The 3 recent new deliveries will add around S$10m per quarter to revenues from the third quarter of this year according to MER’s analysis. In addition, 6 other vessels will be delivered sequentially in the second half of 2015 (2H15) which could add another S$10-15m per quarter.
 
1H15 profit at S$70m, 2H15 should be higher: While MER and the street’s 2015 profit estimates have downside risk now, MER believes 2H15 profits will be sequentially higher as the recent 3 new vessels and 6 others contribute.
 
Biggest positive – NO cancellations: All 37 vessels are still contracted which implies a steady stream of revenues for the foreseeable future.
 
 
Action and recommendation
Even with 30% downside to estimates, MER believes the stock is extremely cheap: Even with 15E profit of S$150-160m, it trades at 5x price-to-book, and only 0.6x price-to-book now. MER has an Outperform rating on the stock with a 12-month price target of S$1.50. MER believes a stock price catalyst to come from news on re-contracting of vessels.
 

Source: Macquarie Research - 20 Aug 2015