Ezion Holdings

Kim Eng on 12 June 2012

Reiterate BUY; depressed valuations unjustified. Trading at only 6.7x FY12F and 3.9x FY13F PER, Ezion is easily the cheapest offshore and marine stock under our coverage. Yet, its earnings growth potential is one of the strongest at 33% CAGR over the next three years, underscored by clear visibility from secured deals with further upside on additional new contracts. The depressed valuations therefore seem unjustified to us. Reiterate BUY with target price of SGD1.38.

A new contract each month. Since January this year, Ezion has announced at least one contract win a month. Last week, it won a USD86.3m contract to provide a service rig for four years to a national oil major in Central America, believed to be Pemex. We estimate that this would add USD7.0m pa to its net profit over FY13F-16F. With two Australian LNG marine logistics contracts in the bag, Ezion is gunning for a third one under the Australia Pacific LNG (APLNG) project. The tender results should be known by next month. Ezion’s robust contract win momentum suggests that demand for its services remain intact.

Rising gearing not a major worry. Gearing is set to rise to 1.04x in FY12F from 0.35x last year as we expect more draw-downs on its newly established SGD500m multicurrency debt issuance programme (it drew down SGD100m recently) to fufill our estimated capex of USD450m this year. But the strain on the balance sheet should ease as operating cash flows increase on deployment of its units. Asset sale-and-leaseback is an option, but this would reduce overall profitability.

Equity fund-raising not necessarily negative. In our view, even if Ezion decides to raise equity to take on additional projects, this should not be deemed a negative move. Its previous equity fund raising resulted in total dilution of about 18%, but FY10 and FY11 EPS growth of 135% and 45% respectively have more than compensated for this.

Raise TP to SGD1.38. Our target price, which is based on 0.3x PEG, is raised to SGD1.38 as we increase our net profit forecasts for FY13F-14F by about 5% to factor in last week’s new contract. Reiterate BUY.