Taking small steps to improve its balance sheet. Recent moves to dispose its 50% stake in AMC Connector for US$45.5m and the issuance of S$150m perpetual securities are positive steps to improve its balance sheet. However, these exercises will reduce its future income from charter of the vessel and lower its return on equity. The listing of Triyards will also reduce its share of earnings from the yards. Ezra will hold 67% of Triyards post listing.

4QFY12 results preview: Street may be too bullish. We estimate 4QFY12 net profit of ~US$17m, bringing FY12 headline net profit to US$75m. Excluding gains from disposals and fair value adjustment, FY12 core net profit is estimated to be ~US$27m. We expect marginal improvement in gross profit margin to 20% in 4QFY12 (17% in 3QFY12) but weaker US$ will likely to have a negative impact.

Valuation: Revise TP to S$1.14 based on 12x FY13F P/E. While we like the Ezra's potential growth from the subsea unit, the stock appears fairly valued at 12x FY13F P/E, in-line with the valuation multiple for Subsea 7. Key upside risks: (1) Stronger-than-expected subsea margins; and (2) a sharp increase in charter rates for offshore support vessels.

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We revise FY12-14F net profit (after preferred dividend) by -5%, +4% and +18% respectively after factoring: (1) the dilution impact from listing of Triyards, (2) impact from perpetual securities, and (3) higher revenue estimates for the subsea unit given the robust outlook.

We think consensus still too bullish. Our FY12-14F core net profit estimates are 20-46% below consensus. We believe the key difference is our lower projected margins for subsea and offshore support services businesses. Weaker US$ from Jun to Aug 2012 will also have a negative impact on 4QFY12 net profit.

Valuation: We value Ezra at S$1.14 based on 12x FY13F P/E. While we like the Ezra's growth from the subsea unit, stock appears fairly valued at 12x FY13F P/E, in-line with Subsea 7. Subsea giants like Saipem and Technip are trading at higher valuation multiples but all have superior ROEs and lower net gearing. Following the issuance of the perpetual securities, we expect Ezra's gearing level to stay flat at 1.0x in FY13 before declining to 0.7x in FY14 as capex declines.

Subsea unit should benefit from robust outlook. We expect Ezra's subsea unit, EMAS AMC, to show strong topline growth in the next two years as they ramp up their asset utilisation and improve their contract wins. We forecast subsea revenue to grow from US$530m in FY12F to US$861m in FY14F, backed by the deployment of all its major subsea assets such as AMC Connector, Boa Deep C, Boa Sub C, Lewek Falcon, Lewek Crusader and Lewek Champion. Ezra's ice class vessel, Lewek Constellation, will be delivered in 2014 and we expect the vessel to have partial contribution in FY14.

We also updated our model for other key developments:

Lower stake in Perisai due to exercise of call option by Izzet Ishak. The sale of 66m shares in Perisai to Izzet Ishak in Jul 2012 under a call option means that Ezra could no longer account the earnings in Perisai as an associate. Following the exercise of the call option, Ezra's stake in Perisai fell from 23.8% to 16.0%. The shares are held by HCM Logistics (7.75%) and EMAS Offshore (8.3%).

Accounting of perpetual securities as equity will lower Ezra's net gearing. On 18 Sept 2012, Ezra announced that they have issued S$150m (US$120m) perpetual securities at a fixed rate of 8.75%, subject to reset every three years with a one-time step-up in 2015. Distributions will be paid semi-annually. With the perpetual securities, we estimate that Ezra's net gearing will stay flat in FY13 before declining to 0.7x in FY14.

Disposal of 50% stake in AMC Connector for US$45.5m. The sale was completed on 12 Oct 2012. Ezra will bareboat charter the vessels back from Ocean Yield for ten years with an option to acquire during the charter period. The first option is exercisable after five years from the date of the charter contact. Following the disposal, Ezra could no longer book the earnings from the US$315m vessel, which we estimate to be around US$10-11m per annum. Instead, Ezra will be required to pay a bareboat charter to Ocean Yield. Assuming a project IRR of 12% (18% equity IRR), we estimate bareboat day rate of US$135,000 per day (US$49.3m per annum).

    

    

Source: OSK