• Ezion's trading suspended as talks with an undisclosed potential strategic investor advanced to due diligence stage. 
• Delay in credit lines affect vessel deployment plan and earnings recovery. 
• Revise down FY19/20 earnings forecasts. 
• Maintain HOLD and Target Price S$0.05. 

Maintain HOLD; Target Price S$ 0.05, Based on 10x FY20F Fully Diluted PE

• We have lowered our FY20 earnings forecasts by 45% given the slower-than-expected ramp-up in utilisation and revenue.
• While it is darkest before dawn and 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. The potential white knight coming in to inject capital should augment Ezion’s balance sheet.

Strategic Tie-up With China Merchant Key to Long-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 it has taken longer than expected. While the company 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 10x FY20 fully diluted PE, cross-checked against DCF, arriving at a target price of S$ 0.05. We assume full conversion and exercise of bondholders’ warrants in 2020.
• Ezion has made ~US$1.5bn impairments in 2015-2018.

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 - In Advanced Talks With Strategic Investor

Trading suspension.

• Ezion has called for a trading suspension in view of its advanced talks with an undisclosed potential strategic investor, which has commenced due diligence. The potential strategic investor also needs to agree terms with the secured lenders. The trading suspension could last for several weeks.
• Meanwhile, Ezion continues to work intensely with secured lenders to complete the documentation and expedite the drawdown of funds to redeploy the vessels.
• The new investor could add value in view of Ezion’s financial constraints. A capital injection would augment its balance sheet which has turned to a net liability after impairments in 4Q18.

4Q18 Results Review

4Q18 remained in the red.

• While revenue rose 6% q-o-q to US$29.7m, Ezion continued to make core losses (excluding impairment losses of US$362.7m, foreign exchange (forex) gains of US$6.7m and gains from the derecognition of associate AUSGROUP LIMITED (SGX:5GJ) of US$6.5m) of ~US$28m. Revenue was affected by the delay in redeployment due to working capital constraints and higher maintenance cost incurred for these vessels .
• Impairment losses on PPE, trade receivables and loans to JV amounted to US$362.7m in 4Q18, as guided in the company’s profit warning in early Feb. As a result, Ezion turned into a net liability of US$255m as of end Dec-2018.

Operating cash flow weakened.

• In 4Q18, Ezion had a negative operating cash flow of US$10.8m (vs positive US$5.6m a quarter ago) due to higher working capital requirements. There were more payments made to suppliers in preparation for the delivery of liftboats.

Earnings revisions.

• Our earnings forecasts for FY19/20 have been lowered to factor in the slower ramp-up in utilisation.
• We now expect FY19 to remain in the red of US$13m vs profit of US$10m previously; while FY20 bottom line estimates are also lowered by 45%.

Source: DBS Research - 08 Mar 2019