Ezion Holdings

Kim Eng on 20 Sept 2012

TP raised, reiterate BUY. Following our last BUY call after its 2Q12 results, Ezion’s stock price momentum has accelerated with a 29% gain. We believe that the market is starting to realise its earnings growth potential. We are upgrading our target price to SGD1.66, ahead of potential contract wins, which we believe would be positive stock price triggers. Reiterate BUY.

Fund-raising heralds new contracts ahead. Ezion recently completed an issuance of SGD125m 7.8% perpetual securities. Over the past year, Ezion’s contract announcements were often preceded by some fund-raising exercises. We believe that the current issuance could be a sign for more contract wins ahead. While it would be hard to guess what kind of contracts Ezion would secure, we postulate that incremental net profit potential could be up to USD3-7m per unit of service rig contract and USD6.5-7.5m per unit of super liftboat contract.

High cost of perpetuals not a concern. At 7.8%, the cost of funding may appear relatively high compared to the previous bond issue which was at 5.25%. However, given Ezion’s high ROEs for its projects (typically>30%), we see no cause for concern. Moreover, yearly distribution for the perpetuals would only amount to SGD9.75m which Ezion should be able to support comfortably as we expect it to turn free cashflow positive from FY14F.

Forgotten marine supply bases. Ezion’s marine supply base business has often been forgotten. As offshore activities turn more prolific in Australia, Ezion’s marine supply bases could be a force to be reckoned with. Its two marine supply bases are strategically located in Western and Northern Australia, in close proximity to offshore projects in the area. We have not accounted for this in our forecasts.

TP raised to SGD1.66. Reiterate BUY on Ezion with target price raised to SGD1.66, pegged to 9.5x diluted FY13F PER. We switch from PEG to PER methodology for easier comparison among offshore & marine peers. We also incorporated accounting of perpetuals into our model.