Ezion Holdings

DMG & Partners Research on June 7 2012

EZION Holdings has secured a new four-year charter for a service rig from a national oil major (believed to be Pemex) valued at US$86.3 million. The rig is expected to be delivered in December 2012 and will be the third unit to be deployed in the Sonda de Campeche field. We estimate that the latest project will add about US$6.4 million net profit a year. Following the new contract, we raise our FY2013-14 earnings forecasts by 11 per cent and 10 per cent, respectively. Consequently, our target price is revised upwards from S$1.25 to S$1.31, based on an unchanged target PE of 10 times based on blended FY2012/13 forecast fully diluted EPS. Maintain "buy".

Ezion will spend US$23 million to purchase an old rig from the market and US$32 million to upgrade and refurbish the rig. The project cost will be depreciated over 10 years. Agreements are in place to buy ENSCO 59, a 30-year-old jack-up rig, from Ensco and also major equipment for the upgrade. The project will be funded by 30 per cent equity (US$16.5 million) and 70 per cent bank borrowings (US$38.5 million). Under the contract, Ezion will provide the rig and take care of the workers on board and maintenance. They will not be involved in the drilling process.

The annual operating cost is expected to be in the range of US$4.5 million-US$5.0 million a year. Ezion will also incur a 10 per cent withholding tax of around US$2 million. All in, we estimate the latest project to contribute US$6.4 million in net profit to Ezion's FY2013 net profit.

Year-to-date, Ezion has secured six long-term charters valued at US$524 million from various oil majors and one Chinese state-owned company. The total value is 4.9 times Ezion's FY2011 revenue. Ezion is eyeing more rig charters and is also bidding for logistics work at the APLNG in Australia. Tender results for APLNG should be out in July.

We expect Ezion's fleet of liftboats and service rigs to grow from four units to 14 units by Q3 2013. The fleet expansion will be the key driver for earnings growth as all assets have secured long-term charters. Key risks are cost overrun and failure to deliver the rigs.
BUY