• Amends terms of REPS
• Positive for both funds and Ezion
• Slight recovery in sentiment

Amends terms of redeemable exchangeable pref shares

Ezion Holdings has entered into a supplemental agreement with the holders of its redeemable exchangeable preference shares (REPS), and its wholly owned subsidiary, Teras Investments Pte Ltd to amend the terms of the REPS: 1) the maturity of the REPS shall be extended by three years, from 10 Oct 2016 to 10 Oct 2019, and 2) no annual dividend in respect of the outstanding REPS as at the maturity date shall accrue and be payable for the period 11 Oct 2016 to the maturity date. Recall that two firms (Evia Capital Partners- S$18m and Venstar Capital Management- S$12m) were the investors in the REPS in 2013, which raised S$30m in gross proceeds and S$29.5m in net proceeds for Ezion. The REPS are convertible into ordinary shares of Ezion based on the exchange price of S$1.8214 (adjusted for bonus shares), but so far none of the REPS have been converted into shares.

Impact on the funds – more positive than negative

According to the terms of the agreement, the REPS holders (i.e. the funds) will see their REPS mandatorily converted to shares at the exercise price of S$1.8214 at the maturity date, if Teras Investments (Ezion’s subsidiary) does not redeem any outstanding REPS. With the recent amendment, the funds can wait for another three years before converting their REPS to shares, hopefully by then Ezion’s share price would be higher.

Impact on Ezion - positive

The REPS holders are entitled to an annual dividend of 5%, which are payable cumulatively on the maturity date. With the amendment of the terms, we estimate that Ezion will be able to delay payment of about S$4.5m in annual dividends for three years. No annual dividends for the period 11 Oct 2016 to the maturity date will also be accrued. Finally, there will not be an immediate share dilution from the conversion of the REPS into Ezion shares because of the postponement in maturity date. Meanwhile, with the recovery in sector valuations due to a stronger oil price, we increase our P/B valuation from 0.35 to 0.4x, such that our fair value estimate rises from S$0.30 to S$0.35. Maintain HOLD.

Source: OCBC Research - 11 Oct 2016