• Still generating operating CF
• Raises funds prior to Swiber
• Lower valuations in sector

US$19.8m net profit in 2Q16

Ezion Holdings reported a 7.0% YoY drop in revenue to US$83.7m and a 31.5% fall in net profit to US$19.8m in 2Q16, such that 1H16 net profit accounted for 52% and 45% of ours and the street’s full year estimates, respectively. Revenue was lower as a few service rigs underwent modification and routine class surveys, while bottom-line was boosted by a US$14.6m gain on disposal of an asset.

Gross profit margin was lower at 21.4% in 2Q16 vs. 25.2% in 1Q16, mainly because a service rig that worked in 1Q16 was taken out of the fleet for major enhancements in 2Q16 and did not contribute to revenue in the quarter. Costs such as depreciation, interest and crew costs continued to be incurred. In addition, an associated company recognised impairment losses and there were lower contributions from JVs.

From a cashflow perspective, Ezion generated operating cash flow of US$27.4m in the quarter, bringing 1H16 net operating cashflow to US$58.3m.

3Q16 likely to be lacklustre

Looking ahead, Ezion expects to generate more cashflows in 4Q16 as about four of its units should be deployed by then. For 3Q16, however, we are more circumspect and expect core operating results should be similar to 2Q16. It would also not be surprising if the group takes the chance to refinance some of its short-term debt (e.g. lengthening tenor etc) in 3Q16, considering that it has not done so since the onset of the oil crisis.

Lower valuations across the board

The Swiber incident has greatly affected sentiment in the O&M sector, and corporates are likely to find it difficult to raise new funds under the current environment. Fortunately for Ezion, the group was able to raise about US$100m from its recent rights issue before news about Swiber broke out. However, given lower valuations that the sector is trading at, we lower our valuation from 0.4x to 0.35x NTA, such that our fair value estimate drops from S$0.42 (post-rights) to S$0.30. Maintain HOLD.  

Source: OCBC Research - 12 Aug 2016