Ezion  has  entered  into  a  subscription  agreement  for  29.5m  Triyards warrants,  on  condition  it  directs  at  least  USD150m  of  newbuild contracts  to  the vessel  builder.  Maintain  BUY  and  SGD2.65  TP  (79.1% upside).  This is the execution of a long-term strategy to manage  its rigs delivery  schedule,  which  should  avoid  future  rig  delay  opportunity costs. The USD16.6m investment in Triyards has an implied payback of under six months.  

Up to 8.33% stake in well-qualified Triyards  (ETL SP, NR).  Ezion has subscribed for 29.5m Triyards warrants for USD1 consideration in total at an exercise price of USD0.563 per share, exercisable on condition (see below) over a period of three years. The USD16.6m exercise quantum represents  8.33%  of  the  enlarged  share  capital  in  the  vessel  builder. Triyards is well-qualified for Ezion's work, having built Ezra's (EZRA SP, NEUTRAL,  TP:  SGD0.85)  Lewek  Constellation,  one  of  the  most technologiclly  sophisticated offshore vessels in the world today,  as well as its own liftboat and drilling rig designs.

Read-through: Ezion is confident of signing  three  new contracts in the next 120 days.  The exercise conditions  stipulate the introduction of shipbuilding  contracts  worth  at  least  USD150m  to  Triyards  within  the next 120 days. This  indicates  that Ezion is confident of securing at least three  new  service  rig  contracts  during  this  period,  assuming  each  rig costs USD60m. This should assuage investor concerns that the lower oil price may affect future contract flows.

6-month  implied  payback.  From  the  start  of  this  year,  we  have gradually  trimmed  our  FY14/FY15  core  PATMI  forecast  to USD190m/USD296m  from  USD228m/USD307m  respectively  due  to delays in deliveries. This  implies  that the opportunity cost of such delays is  actually  USD38m/USD11m in  FY14/FY15  respectively. We  view  this USD16.6m as a small price to pay to avoid such losses, with a payback period under six months if Triyards can help Ezion save USD38m a year.

Still one of our Top Picks for strong locked-in growth. Ezion remains one  of  our  Top  Picks  for  its  35%/56%  growth  with  strong  contract coverage  over  the  next  three  years  (See  Figure  1).  Maintain  BUY  and SGD2.65 TP based on 12x blended FY14F/15F P/E.

Source: OSK-DMG