Ezion  (EZI)  has  proposed  to  acquire  a  stake  in  Ocean  Sky  (OS)  to  be paid with 20.2m new EZI shares, while injecting its marine supply base business  into  OS.  We  are  neutral  on  the  news  as  near-term  earnings dilution  will  be  offset  by  a  lighter  balance  sheet,  thus  allowing  the company to expand its liftboat business more aggressively. We cut our FY13-15F EPS by 1-4%. Maintain BUY, with a lower SGD3.18 TP. 

- The news. EZI proposed to: i) acquire 440m new shares in Ocean Sky (OS) for SGD47.52m (SGD0.108/share), to be satisfied by the issuance of  20.2m  new  EZI  shares  at  SGD2.351/share,  ii)  acquire  165m  share options for SGD1.00, exercisable into new OS shares at the strike price of SGD0.108/share, iii) inject its marine supply base business into OS by selling  Ezion  Offshore  Logistics  Hub  (EOLH)  for  SGD100k  cash.  We think  the  price  tag  is  fair,  given  our  post-placement  NTA  estimate  of
SGD0.122/share for OS.

- For  starters,  OS  will  focus  on  marine  supply  base.  EZI's  COO Captain  Larry  Johnson  will  be  re-designated  as  the  CEO  of  OS,  while Peter Lee, who is Deputy COO, will be promoted to COO. We do not rule out that EZI could potentially shift the Australian logistics fleet into OS in the future, making EZI a pure play liftboat and service rig player.

- More debt headroom for liftboat capex. While the cash consideration for  EOLH  appears  low  at  SGD100k,  we  estimate  EZI  will  unload c.USD30m debt incurred for the development of the marine supply base into  OS,  easing  its  FY13F  net  gearing  from  1.10x  to  1.04x.  In  addition, future capex  for the marine base will no longer be incurred under EZI's own  balance  sheet,  leaving  EZI  with  more  debt  headroom  for  its  core liftboat and service rig business.

- Maintain  BUY,  with  lower  SGD3.18  TP.  We  cut  FY13-15F  EPS  by 1.2%/2.9%/4.0%  to  reflect  the  dilution  and  loss  of  earnings  from  the marine supply base. We trim our TP from SGD3.26 to SGD3.18, pegged to  16x  blended  FY13-14F  fully  diluted  EPS. We  remain  positive  on  EZI given  its  strong  earnings  and  room  for  EPS  upgrades  from  new contracts.

Source: OSK