• Expect another loss-making quarter; more asset impairments. 
• Delayed deployment schedule. 
• Awaiting clearer signs of turnaround. 
• Downgrade to HOLD; Target Price lowered to S$0.06. 

Downgrade to HOLD

• Target Price reduced to S$0.06, after pegging a lower target multiple of 0.3x on FY19F book value (vs 0.8x previously), given potential asset impairments and slower-than-expected ramp up in utilisation and revenue.
• While it is darkest before dawn and the EZION HOLDINGS LIMITED (SGX:5ME)’s valuation has been greatly discounted for the slow recovery, clearer signs of a turnaround are required to re-rate the stock.
• Downgrade to HOLD.

Strategic Tie-up With China Merchant Key to Longer Term Growth Prospects

• Ezion has formed a joint venture (JV) with China Merchant Group’s 52%-owned subsidiary, TSC Group to cooperate in the ownership and operations of liftboats. We believe such tie-ups with prominent industry players enhance Ezion’s growth prospects, which would otherwise be constrained by its high gearing level.

Where We Differ

• We remain hopeful on Ezion’s turnaround, though this has been taking longer than expected. While it has also been hit hard by the recent oil crisis, Ezion is among the few surviving players with a niche competitive edge in liftboats, a segment with better demand/supply outlook relative to other offshore support vessels.

Valuation

• We value Ezion based on 0.3x FY19F book value, in anticipation of impairment of shareholder loans and fair value adjustment of vessels, arriving at a target price of S$ 0.06.
• Our FY19F book value has only factored in ~US$1.1bn total impairments made in 2015-2017. We assume full conversion and exercise of bondholders’ warrants in 2020.

Key Risks to Our View

• Slower recovery. Drop in oil price below US$50/bbl may hit O&G activities, and thus drag demand and day rates for liftboats. This poses downside risk to our earnings forecasts.

What's New - Profit Warning

4Q18 in the red; potential impairment on loans to JV:

• Ezion expects to record a net loss for 4Q18 and FY18. Operationally, we had expected a sequentially narrower net loss of ~US$15m in 4Q18 as compared to ~US$20m a quarter ago. However, it seems that the losses could now be wider as management guided for potential impairment on shareholder loans to joint ventures in view of the challenging operating environment.

Fair value adjustment for vessels.

• There could also be an adjustment to reflect a reduction in fair value of vessels made through retained earnings. Ezion has elected the optional exemption in SFRS(I) 1 to value the vessels owned by the Group and will use that fair value as the vessels deemed cost in its SFRS(I) financial statements. While the fair values of the vessels are still under review, the Group expects a significant decrease in the net asset value of the Group from this fair value exercise.
• We estimate the book values of liftboats and jackups are approximately US$620m and US$540m respectively. We believe the impairment will likely be on jackups, which face challenges to be redployed. Assuming a 20% decline, this translates to ~ US$108m reduction in value of jackups. This will be adjusted through retained earnings line and hence no material impact expected on the P&L.
• The incremental shareholder loans to JV was ~US$120m in 3Q18. Assuming impairment of the full amount, together with vessel fair value adjustment, equity value could be reduced by ~US$200m or ~50%.

Push-back in vessel deployment.

• Management provided an update that the loan agreements for certain secured lenders, which were supposed to be completed by end 2018, are still being finalised. As a result, the delays have severely impacted the deployment of the vessels as the Group is unable to drawdown the required funds.
• Deferment in rigs schedule includes the following:
  • 2 Liftboats were rejected by a national oil company over concerns relating to operational and maintenance issues arising from the shortage of funds.
  • 1 Liftboat and 1 Jack-up Rig are facing delays due to lack of funding to commence modifications required by an oil major.
  • 1 Liftboat encountered mechanical issues and requires funding for repairs.
  • The builder (under administration) for 1 Liftboat is contesting ownership.
  • 1 Jack-up Rig has to be redeployed and requires additional funding due to re-imposed sanctions on the country of deployment.
• Ezion had 5 liftboats working as of end 3Q18 and was to have 8-9 units contributing by end 2018. With the delays, there will be 7 units (out of a total of 12 units) in operation until the financing issues are resolved.
• Ezion has also not been able to achieve meaningful deployment for some of the Jack-up Rigs and is facing payment delays and defaults by customers.
• We await better clarity and will fine-tune our forecasts after of FY18 results.

Source: DBS Research - 07 Feb 2019