Results Review, 20 February 2014

Ezion Holdings (EZI SP)

Buy (Maintained)

Energy & Petrochemicals - Oil & Gas Services Market Cap: USD2,204m

Target Price: Price:

SGD3.00 SGD2.31 Macro Risks

Strong EPS Growth Momentum Intact

Growth Value

Ezion Holdings (EZI SP) Relative to Straits Times Index (RHS)

2.5

164

2.4

157

2.3

150

2.2

143

2.1

136

2.0

129

1.9

122

1.8

115

1.7

108

1.6

101

1.5 90 80 70 60 50 40 30 20 10

94



Dec-13

Oct-13

Aug-13

Jun-13

Apr-13

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) Chew Thiam Keng Templeton Havenport

10.4m/8.24m 26.0 29.9 1.61 - 2.43 70

16.1 6.9 4.8

Shariah compliant





Above expectations. Ezion Holdings (Ezion)’s 4Q13 core net profit soared 94% y-o-y to USD39.5m, 17% ahead of our forecast mainly due to higher contribution from its Australian projects and lower interest expenses, as borrowings for asset under construction were capitalised. FY13 core net profit leapt 116% y-o-y to USD142m, thanks to higher revenue (+78% y-o-y) from more deployment of liftboats and service rigs as well as rising contributions (+83% y-o-y) from associates and joint ventures (JV). Higher net gearing a non-issue. High capex lifted Ezion’s net gearing to 1.15x, but this is not a key concern as the debts are backed by longterm charter contracts worth more than USD1.8bn. An estimated 60% of the USD1bn net debt is on a floating rate and the remaining 40% is on a fixed rate. Capex spending for the Australian marine supply base project is now estimated at AUD34m, and could increase by another AUD5m6m in the next two quarters. Two more project delays. Ezion is encountering delays for a service rig project for a South-East Asia national oil company in the Caspian Sea and a project for an oil company in Indonesia. We cut our FY14-15F EPS estimates by 3-4% to reflect the changes. Maintain BUY; lower SGD3.00 TP. We lower our TP to SGD3.00 from SGD3.18 to reflect our FY14F EPS cut. Our TP is pegged to a 13x FY14F P/E. We remain positive on Ezion given its undemanding valuation at 10x FY14F P/E, high earnings visibility from its USD1.8bn charter backlog and positive demand outlook for service rigs. Key risks are: i) a slowdown in contract wins, and ii) delays in upgrade and conversion.

Forecasts and Valuations

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

107

159

282

554

667

Reported net profit (USDm)

58

79

160

217

297

Recurring net profit (USDm)

47

65

141

217

297

58.6

38.4

115.0

54.6

36.8

Total turnover (USDm)

Recurring net profit growth (%) Recurring EPS (USD) DPS (USD)

0.07

0.08

0.12

0.18

0.25

0.001

0.001

0.001

0.001

0.001

Jason Saw +65 6232 3871

Recurring P/E (x)

27.6

24.1

14.8

10.0

7.3

[email protected]

P/B (x)

5.85

4.39

3.09

2.26

1.72

P/CF (x)

38.0

18.3

14.5

6.3

5.3

0.1

0.1

0.1

0.1

0.1

EV/EBITDA (x)

20.2

24.3

16.2

8.4

6.5

Return on average equity (%)

24.3

21.8

27.7

26.2

26.8

Net debt to equity (%)

35.2

75.5

115.0

116.3

85.4

(3.9)

9.2

Lee Yue Jer +65 6232 3898 [email protected]

Dividend Yield (%)

Our vs consensus EPS (%) Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

  2  . 2 0 . 3

0 0 . 2 0 0 Ezion continued to exhibit solid growth with 4Q13 core net profit . 0 surging 94% y-o-y to USD39.5m, 17% above our forecast. This was 0 driven by higher margin from its Australian operations given higher 0 portions of owned assets and lower interest expenses. While we cut our FY14 EPS by 4% due to two project delays, we still expect a healthy earnings growth of 55% for FY14. Maintain BUY, with a SGD3.00 TP.

 Feb-13

Vol m

Price Close

   

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1

Ezion Holdings (EZI SP) 20 February 2014

4QFY13 Results Review Figure 1: Ezion’s interim results 4Q12

4Q13

y-o-y

FY12

FY13

y-o-y

52.3

83.7

60

158.7

281.9

78

Offshore logistics projects

66.7

111.4

67

Ramp-up of Australian operations

Service rigs

92.0

170.5

85

More rigs deployed

70.7

133.2

88

Offshore logistics projects

20.5

37.9

85

Higher margin due to less charter in vessels

Service rigs

50.2

95.3

90

Stable margins

Revenue

Gross profit

Other income

21.5

40.8

90

2.0

2.0

2

17.1

28.5

67

Admin expenses

-4.4

-5.3

20

-12.5

-18.1

45

Other expenses

-1.8

-2.5

42

-4.8

-4.8

0

Reported operating profit

17.3

35.0

102

70.6

138.9

97

Adjusted EBITDA

24.0

50.3

109

73.8

165.5

124

Depreciation

-7.0

-16.4

134

-16.6

-45.4

174

Adjusted operating profit

17.1

33.9

99

57.3

120.1

110

0.4

2.0

374

3.1

5.4

76

-3.1

-3.6

16

-7.8

-12.2

Share of results

6.5

7.8

20

16.9

30.9

Exceptional items

0.2

1.0

340

13.3

18.7

41

Impairment

0.0

-1.0

NM

-0.1

-1.0

857

Interest income Interest expenses

57 Lower than expected as part of borrowings for assets under construction are capitalised 83

Gain on disposal

0.2

2.0

758

13.4

19.7

47

Profit before tax

21.1

41.2

95

82.8

163.0

97

Income tax

-0.6

-0.7

23

-3.9

-2.6

-33

0.0

0.0

NM

0.0

0.1

NM

Net profit attributable to equity holders

20.5

40.5

97

78.8

160.4

103

Core net profit

20.3

39.5

95

65.5

141.7

116

Gross debt

552.4

1,085.9

Gross cash

134.9

166.0

Net debt

417.5

919.9

Total equity

552.8

800.3

Net debt to total equity (x)

0.76

1.15

Perpetual securities

97.7

97.7

Sharehoilders' equity

455.2

702.7

0.92

1.31

5.7

5.6

Minority interest

Remarks

USD2m gain in 4Q13 from disposal of tug and barge Witholding tax from overseas operation

Balance sheet

Net debt to shareholders' equity (x) EBITDA to net debt Margins Group gross profit

44.6%

47.2%

Gross profit margin for offshore logistics

41.0%

48.7%

30.7%

34.0%

Gross profit margin for service rigs

54.6%

55.9%

Adjusted EBITDA

45.9%

60.1%

46.5%

58.7%

Adjusted operating profit

32.6%

40.5%

36.1%

42.6%

Improvement due to more owned assets

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

2

Ezion Holdings (EZI SP) 20 February 2014

Financial Exhibits Profit & Loss (USDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Total turnover

107

159

282

554

667

Cost of sales

(52)

(88)

(149)

(299)

(326) 341

Gross profit Gen & admin expenses Operating profit Operating EBITDA

Dec-15F

55

71

133

255

(14)

(14)

(14)

(18)

(22)

41

57

119

237

319

51

74

165

368

467

(10)

(17)

(45)

(132)

(149)

Operating EBIT

41

57

119

237

319

Net income from investments

10

17

31

37

38

Interest income

2

3

5

5

5

Interest expense

(3)

(8)

(12)

(45)

(45)

Exceptional income - net

11

13

20

Pre-tax profit

61

83

163

Depreciation of fixed assets

Taxation Minority interests Profit after tax & minorities

(3) -

(4)

-

-

234

317

(3)

-

0

(9)

(11)

-

-

225

305

58

79

160

Reported net profit

58

79

160

217

297

Recurring net profit

47

65

141

217

297

Preferred dividends

-

(8)

(8)

Source: Company data, OSK-DMG estimates

Cash flow (USDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

Operating profit

41

57

119

237

319

Depreciation & amortisation

10

17

45

132

149

(20)

19

(5)

23

4

0

(2)

36

93

158

391

2

1

0

5

5

(3)

(7)

(13)

(45)

(45)

-

-

Change in working capital Other operating cash flow Operating cash flow Interest received Interest paid Dividends received

-

(3) 464

1

2

1

Tax paid

(1)

(2)

(2)

Cash flow from operations

34

86

144

343

413

(132)

(683)

(345)

Capex Other new investments Other investing cash flow Cash flow from investing activities Dividends paid Proceeds from issue of shares

(9)

(663)

(709)

51

(1)

(40)

-

8

10

15

-

(73)

(654)

(734)

(1)

(1)

-

(683)

(1)

(345)

(1)

(1)

0

108

Increase in debt

(5)

572

Other financing cash flow

34

(41)

Cash flow from financing activities

28

638

628

346

(51)

Cash at beginning of period

76

63

135

166

172

Total cash generated

87

(11)

-

-

676

315

(50)

(134)

33

(10)

70

38

Forex effects

(2)

2

(6)

Implied cash at end of period

63

135

167

6

-

17

-

-

172

188

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

3

Ezion Holdings (EZI SP) 20 February 2014

Financial Exhibits Balance Sheet (USDm)

Dec-11

Dec-12

Dec-13

Dec-14F

Dec-15F

Total cash and equivalents

63

135

166

172

188

Accounts receivable

32

57

107

152

183

Other current assets

32

80

107

107

107

Total current assets

127

273

380

430

478

72

132

199

236

274

Tangible fixed assets

271

794

1,464

2,015

2,212

Total non-current assets

343

925

1,663

2,252

2,486

Total assets

470

1,198

2,043

2,682

2,963

Short-term debt

39

77

223

280

270

Accounts payable

26

33

69

137

164

Other current liabilities

17

47

84

84

84

Total current liabilities

82

158

376

501

519

118

475

863

1,121

1,081

2

12

4

4

4

Total non-current liabilities

120

487

866

1,124

1,084

Total liabilities

202

645

1,243

1,625

1,603

Share capital

124

260

346

346

346

Retained earnings reserve

144

195

357

613

917

Shareholders' equity

268

455

703

959

1,263

Minority interests

-

-

Other equity

-

Total equity

268

Total liabilities & equity

470

Total investments

Total long-term debt Other liabilities

(0)

(0)

(0)

98

98

98

553

800

1,057

1,360

1,198

2,043

2,682

2,963

98

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

4

Ezion Holdings (EZI SP) 20 February 2014

SWOT Analysis  Strong track record with national oil companies and oil majors in the deployment of liftboats and service rigs across the world

 New players entering the liftboat and service rig business due to potential lucrative returns

 Experienced in working on projects subject to strict environmental protection rules

 Liftboats are not a must-have asset, which may prevent full-scale adoption

 Increased awareness of safety requirements for maintenance work could lead to more liftboat and service rig deployment opportunities  Plenty of room to grow charters due to limited deployment in Asian waters

 High net gearing in balance sheet limits its ability to fund new projects without raising net equity or issuing perpetual securities  Has to seek third-party operators due to limited chartering experience outside South-East Asia

P/E (x) vs EPS growth

P/BV (x) vs ROAE

35 30

180%

8.0

30.0%

154%

7.0

26.3%

6.0

22.5%

5.0

18.8%

4.0

15.0%

3.0

11.3%

2.0

7.5%

25

129%

20

103%

0.0

0.0%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG estimates

P/B (x) (lhs)

Jan-15

0%

Jan-14

0

Jan-13

3.8%

Jan-12

1.0 Jan-11

26%

Jan-15

5

Jan-14

51%

Jan-13

10

Jan-12

77%

Jan-11

15

Return on average equity (rhs)

Source: Company data, OSK-DMG estimates

Company Profile Ezion Holdings is involved in the provision of offshore and marine logistics and owns one of the largest liftboats in the world.

See important disclosures at the end of this report

5

Ezion Holdings (EZI SP) 20 February 2014

Recommendation Chart Price Close 3.18 2.65 3.18

3.26

3.00

2.55 2.48

2.02 2.20 2.16

1.32

1.31

1.37

1.17 1.25

1.00

1.02

0.92 1.04 1.07

0.87 0.85

0.89

2.5

1.00

Recommendations & Target Price

NR

3.0

2.0

1.5 1.0 0.5 Buy 0.0 Feb-09

Neutral

Sell

May-10

Trading Buy

Sep-11

Take Prof it

Not Rated

Dec-12

Source: OSK-DMG estimates, Bloomberg Date

Recommendation

2014-01-03

Buy

Target Price Price 3.18

2.28

2013-12-24

Buy

3.18

2.28

2013-11-08

Buy

2.65

2.08

2013-10-01

Buy

3.18

1.91

2013-08-07

Buy

3.26

1.98

2013-07-18

Buy

3.00

1.92

2013-05-16

Buy

3.00

1.97

2013-04-18

Buy

2.48

1.73

2013-03-20

Buy

2.48

1.64

2013-03-01

Buy

2.48

1.62

Source: OSK-DMG estimates, Bloomberg

See important disclosures at the end of this report

6

DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB” which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of 19 February 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) As of 19 February 2014, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N)

Kuala Lumpur

Hong Kong

Singapore

Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) 2525 1118 Fax : +(852) 2810 0908

DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore 049315 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211

Jakarta

Shanghai

Phnom Penh

PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia) Plaza CIMB Niaga 14th Floor Jl. Jend. Sudirman Kav.25 Jakarta Selatan 12920, Indonesia Tel : +(6221) 2598 6888 Fax : +(6221) 2598 6777

RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai 20041 China Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633

RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) 23 969 161 Fax: +(855) 23 969 171

Bangkok RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok 10500 Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 108 0999

7