Ezra Holdings

Phillip Securities Research, Jan 13

EZRA's Q1 2014 "reported" net earnings of US$6.3 million were lower by 6 per cent y-o-y despite total sales rising by 22 per cent y-o-y. This was mainly due to lower gross margins, other operating and financial income, which was partially offset by better associate (EOC) performance.

Nonetheless, after adjusting for (i) US$2.4 million gain on dilution of interest in associates, and (ii) US$2.7 million on preference dividend, Q1 FY2014 "recurring" net profit was about US$1.2 million (+50 per cent y-o-y, -78 per cent q-o-q).

The Subsea division remains the highest revenue contributor, with gross margin hovering around 12.5-13 per cent (against about 15 per cent in Q4 FY2013). Due to the seasonality of the Subsea business, earnings are generally stronger in the second half of the financial year. Gross margin for the Offshore division eased to the mid high-teens level from about 20 per cent in Q4 FY2013, as two vessels were off-hire for the quarter.

Admin expenses were at US$34 million, lower than the guidance level of US$40 million-US$45 million, as no provision for bonus was made in Q1 FY2014. Effective tax was lower at 28 per cent (against 38 per cent in Q4 FY2013), due to a decrease in withholding tax arising from a change in operating area for certain vessels.

Ezra expects that the long-term fundamentals of the oil and gas industry will remain strong with increased investments. According to management, Ezra's Subsea order book was around US$1.2 billion- US$1.3 billion as of end-Q1 2013, and is currently bidding for about US$9 billion in Subsea contracts. This indicates the healthy prospects of the Subsea industry.

We cut our FY2014/15 earnings estimates by 12 per cent/3 per cent to factor in lower gross margins. However, our fair value increases from S$1.18 to S$1.27 as we are raising our valuation peg from 13 times previously to 14 times - comparable to its Subsea peers trading at an average forward PE of 14.4 times. Although this is the second consecutive quarter of profitability for the Subsea division, we still remain concerned with project execution risk, and its ability to translate strong top-line into earnings growth. Maintain "neutral".

NEUTRAL