Ezra Holdings 2013 July 15 by DSVB

7/28/2019 Ezra Holdings 2013 July 15 by DSVB

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www.dbsvickers.com

sa: YM

FULLY VALUED S$0.955 STI : 3,236.06Downgrade from BUY

Price Target : 12-Month S$ 0.90 (Prev S$ 1.56)Reason for Report : Change in earnings and TPPotential Catalyst: Sustainable recovery in margins, better earningsexecution in subsequent quarters

DBSV vs Consensus: Lower, more bearish on marginsAnalystSuvro SARKAR +65 6398 [email protected]

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Relative IndexS$

Ezra Holdings (LHS) Relative STI INDEX (RHS)

Forecasts and ValuationFY Aug (US$ m) 2011A 2012A 2013F 2014FRevenue 559 984 1,165 1,296EBITDA 78 120 58 144Pre-tax Profit 52 87 73 45Net Profit 43 65 46 37Net Pft (Pre-Ex, Aft Pref Div)* 16 14 (65) 26EPS (S cts) 6.3 8.4 5.9 4.7EPS Pre Ex, Aft Pref Div (S cts) 2.3 1.8 (8.4) 3.4EPS Gth (%) (55) 34 (30) (20)EPS Gth Pre Ex, Aft pref div (%) (76) (20) nm nmNet DPS (S cts) 0.0 0.0 0.0 0.0BV Per Share (S cts) 123.4 130.5 132.3 135.6PE (X) 15.2 11.4 16.2 20.2PE Pre Ex, aft pref div (X) 41.2 51.8 nm 28.3P/Cash Flow (X) nm nm 18.4 46.5

EV/EBITDA (X) 19.0 15.4 35.1 14.8Net Div Yield (%) 0.0 0.0 0.0 0.0P/Book Value (X) 0.8 0.7 0.7 0.7Net Debt/Equity (X) 1.0 1.1 1.0 1.1ROAE (%) 6.0 7.0 3.5 2.5

Net Profit Rev (%): (3.6) (45.8)Consensus EPS (S cts): 8.1 10.1Other Broker Recs: B: 3 S: 6 H: 6ICB Industry :Oil & GasICB Sector: Oil Equipment; Services & DistPrincipal Business: Ezra is an integrated offshore solutions providerfor the oil and gas industry in the Asia Pacific region.

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

At A Glance Issued Capital (m shrs) 979Mkt. Cap (S$m/US$m) 935 / 741Major Shareholders

Lee Chye Tek (%) 18.9Aker Solutions AS (%) 7.4Mondrian Investment (%) 7.3

Free Float (%) 66.4Avg. Daily Vol.(000) 4,893

DBS Group Research . Equity 15 Jul 2013

Singapore Company Focus

Ezra HoldingsBloomberg: EZRA SP | Reuters: EZRA.SI Refer to important disclosures at the end of this report

Turbulent waters Disappointing core net loss of US$58m in 3Q13

Write-offs on legacy projects and project delayslead to negative contribution from subsea

Order win momentum sustained but executionrisks will likely overshadow

Low visibility on margin recovery, downgradeto Fully Valued with lower TP of S$0.90

3Q significantly below. Stripping out exceptional gains ofabout US$65m, including gains on disposal of its remaining

stake in Ezion, Ezra would have recorded a core net loss of

about US$58m in 3Q-FY13. The underperformance was

driven by i) negative contribution from subsea division as a

result of project delays in the North Sea, adverse timing of

revenue receipts and write-offs related to legacy projects and

ii) lower revenue and weaker margins from the offshore

chartering division owing to sub-optimal utilisation of fleet.

Admin expenses were also higher than normal levels.

Order wins continue. The subsea division EMAS AMC

reported order wins of about US$400m across North Sea,

West Africa and Gulf of Mexico, taking YTD order wins toUS$1.4bn. However, with most projects requiring long lead

times and stretching from 2014 to 2016, near term impact is

not significant. We continue to expect another US$1.5bn

worth of new subsea contracts in FY14.

But execution is the main concern. Apart from costs

associated with certain legacy projects, project delays and

other risks associated with offshore EPC contracts will

continue to impact Ezras subsea operations, in our view. The

integration of AMC has taken longer than expected and we

rationalize our margin expectations, going forward. As a

result, we now forecast a full year core net loss of US$55m

and cut our FY14 net profit forecast by 46% to US$37m. Our

SOTP valuation is revised down to S$0.90, based on 0.8x P/BV

for Ezras core operations, down from 1.15x P/BV earlier, to

account for lower margins and ROEs as well as risks associated

with a highly geared balance sheet amidst a potentially rising

interest rate environment in future. Downgrade to Full Valued.


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Company Focus

Ezra Holdings

Page 2

3Q-FY13 results summary and comments

FY Aug (US$ m) 2Q12 1Q13 2Q13 chgy-o-y chgq-o-q CommentsSegmental revenueOffshore Support Services 65.2 70.8 64.5 -1% -9% 7 vessels were off-hire for the quarter owing to

change in deployment strategy

Marine Services 38.1 41.4 51.0 34% 23% Work ongoing on 3 SEUs

Subsea Services 162.3 135.0 201.6 24% 49% Increase in line with higher orderbook

Total Revenue 265.6 247.1 317.1 19% 28%Gross Profit 44.4 42.3 2.2 -95% -95%

Other op income 1.1 1.3 4.5 293% 251%

Admin exp (34.0) (35.1) (44.1) 30% 26% Higher personnel and administrative costincurred as Subsea division human

infrastructure is built up in preparation of newprojects and vessels; higher than normalised

level in this quarter

Operating Income 11.5 8.5 (37.4) -425% -541%

Non-op Inc/(Exp) 7.7 1.1 (5.9) -177% -659%

Net Interest Inc/(Exp) (8.9) (9.3) (11.0) 24% 18%

Assocs' / JV Income 0.4 8.2 5.8 1551% -29% Better performance and turnaround atassociates y-o-y

Exceptionals 17.6 32.0 64.9 269% 102% Disposal gain on Ezion shares

Pretax Profit 28.2 40.4 16.4 -42% -59%

Tax (5.8) (7.4) (6.7) 15% -9%Minority Interests 0.0 (3.3) (2.5) NM NM

Net Profit 22.4 29.7 7.2 -68% -76%Recurring Net Profit 4.8 (2.4) (57.7) NM NMMargins (%)Gross Margin 16.7% 17.1% 0.7%

EBIT Margin 4.3% 3.4% -11.8%

Recurring Net Margin 1.8% -1.0% -18.2%

Source: Ezra, DBS Vickers

Order wins continue at subsea division. The subsea divisionEMAS AMC reported order wins of about US$400m across

North Sea, West Africa and Gulf of Mexico, including LOIs

and options. This takes YTD order wins to about US$1.4bn,

above our expectations. Current orderbook stands at about

US$1.5bn. However, with most projects requiring long lead

times and stretching from 2014 to 2016, near term impact

is not significant. We continue to expect another US$1.5bn

worth of new subsea contracts in FY14, including projects

for its state-of-the-art construction & pipelay vessel, Lewek

Constellation.

Total orderbook should stand at about US$2.5bn today.Apart from the order wins secured by EMAS AMC, the

offshore chartering division EMAS Marine also announced

charter contracts of about US$102m (including options) for

1 PSV and 4 AHTS vessels. Along with the order backlog of

about US$265m at Triyards, total orderbook for the Group

should be close to US$2.5bn, which implies a decent book-

to-bill ratio of about 2.0x. However, despite good revenue

visibility on most fronts, the key for Ezra management

would be to deliver on the execution front


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Company Focus

Ezra Holdings

Page 3

But execution is the main concern. Apart from costsassociated with certain legacy projects, project delays and

other risks associated with offshore EPC contracts will

continue to impact Ezras subsea operations in our view.

The integration of AMC has taken longer than expected

and we rationalize our margin expectations, going forward.

Ezra is not alone in this predicament, as other major subsea

players like Saipem, Subsea 7 and Aker Solutions have also

spoken about rising costs, project delays and challenging

operating environment in the North Sea and elsewhere.

Recent comments on the back of profit warnings by some

of these industry players are outlined below.

Slew of profit warnings from global subsea players this year

Company Date CommentsSaipem 14-Jun-2013 Second profit warning in less than 5 months

Expects a net loss of Eur300-350m because of problems in contracts in Algeria,Mexico and Canada

Subsea 7 27-Jun-2013 Warned of missing its 2013 earnings forecast due to cost overruns at Brazil project Forced to rethink Brazil business strategy owing to difficult operating environment

Aker Solutions 29-Apr-2013 Profit warning owing to delays and increased costs on several projects Mostly facing issues in Norway this time Warned that its troubles this year reflected both increased market uncertainty and

portfolio sensitivities and order intake in coming quarters was at risk due to recentproject cancellations and postponements

Source: Company websites, DBS Vickers

Rising interest rate scenario will also weigh on earnings. Ezracurrently has a net gearing ratio of about 1.1x, with more than

US$1bn worth of borrowings on its balance sheet, excluding

the perpetual securities issue. About 60% of these loans are ona floating rate basis, and while there is no significant

refinancing for the fixed rate bonds in issue, we reckon a rising

interest rate environment could hurt Ezra significantly, given the

narrow operating margins it is likely to enjoy in the near to

medium term.

Downgrade to Fully Valued, TP S$0.90. Factoring in low marginvisibility and higher interest costs, we now forecast a full year

core net loss of US$55m and cut our FY14 net profit forecast

by 46% to US$37m. Our SOTP valuation is revised down toS$0.90, based on 0.8x P/BV for Ezras core operations, down

from 1.15x P/BV earlier, to account for lower margins and ROEs

as well as risks associated with a highly geared balance sheet

amidst a potentially rising interest rate environment in future.

Downgrade to Full Valued.

Revised SOTP valuation for Ezra

SOTP Valuation Stake Value(S$ m) Value per share(S$) % ofvaluation BasisEzra's core businesses (ex Triyards and assocs) 100.0% 676.1 0.63 70% 0.8x adjusted P/BV

Triyards Holdings 67.0% 145.3 0.14 6% Market priceEOC Ltd 46.5% 60.2 0.06 15% 14x recurring FY13F EPS

Perisai Petroleum 15.0% 83.5 0.08 9% Market price

965.1 0.90 100% Fully diluted TPSource: Bloomberg, DBS Vickers


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Company Focus

Ezra Holdings

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Key AssumptionsFY Aug 2010A 2011A 2012A 2013F 2014F

Offshore fleet utilisation 94.0 93.0 90.0 93.0 95.0Day rate (US$/ bhp/ 2.0 1.9 1.8 1.8 1.8New orders - Yard (US$ 130.0 121.0 76.5 200.0 200.0New orders - Subsea N/A 640.0 613.0 1,500.0 1,500.0

Segmental BreakdownFY Aug 2010A 2011A 2012A 2013F 2014FRevenues (US$ m)

Offshore Support 199 219 275 292 327Marine Services 134 160 157 175 185Subsea Services 21 180 552 698 784

Total 354 559 984 1,165 1,296Gross Profit (US$ m)

Offshore Support 70 70 52 60 76Marine Services 34 38 45 38 36Subsea Services 1 6 89 53 132

Total 104 114 186 152 244Gross Profit Margins

Offshore Support 35.1 32.0 18.9 20.7 23.1Marine Services 25.0 24.0 28.6 22.0 19.7Subsea Services 3.0 3.1 16.2 7.6 16.8

Total 29.4 20.4 18.9 13.1 18.8Income Statement (US$ m)FY Aug 2010A 2011A 2012A 2013F 2014FRevenue 354 559 984 1,165 1,296Cost of Goods Sold (250) (445) (798) (1,013) (1,052)Gross Profit 104 114 186 152 244Other Opng (Exp)/Inc (46) (67) (131) (148) (164)Operating Profit 58 48 56 4 80Other Non Opg (Exp)/Inc (1) (10) 10 (5) 0Associates & JV Inc 13 11 5 13 15Net Interest (Exp)/Inc (12) (24) (35) (40) (50)Exceptional Gain/(Loss) 22 27 51 101 0Pre-tax Profit 80 52 87 73 45Tax (3) (9) (22) (20) (7)Minority Interest 0 0 0 (7) (2)Net Profit 77 43 65 46 37Net Profit before Except. 54 16 14 (55) 37Preference Dividend 0 0 0 (10) (11)

Net Pft Pre-Ex, Aft Pref Div 54 16 14 (65) 26EBITDA 81 78 120 58 144GrowthRevenue Gth (%) 7.3 58.1 76.0 18.3 11.3EBITDA Gth (%) (9.5) (4.7) 54.5 (51.7) 148.6Opg Profit Gth (%) (26.1) (17.6) 17.2 (93.2) 2,018.9Net Profit Gth (%) 9.4 (43.8) 50.7 (29.9) (19.5)Net Pft Pre-Ex Aft Perf DivGth (%)

(22.3) (70.7) (10.3) nm nm

Margins & RatioGross Margins (%) 29.4 20.4 18.9 13.1 18.8Opg Profit Margin (%) 16.3 8.5 5.7 0.3 6.2Net Profit Margin (%) 21.7 7.7 6.6 3.9 2.8ROAE (%) 13.6 6.0 7.0 3.5 2.5ROA (%) 6.4 2.4 2.7 1.2 0.8ROCE (%) 5.2 2.6 2.0 0.1 2.5

Div Payout Ratio (%) 12.0 0.0 0.0 0.0 0.0Net Interest Cover (x) 4.9 2.0 1.6 0.1 1.6Source: Company, DBS Vickers

Margins Trend

0.0%

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20.0%

2010A 2011A 2012A 2013F 2014F

Op er at in g M ar gin % N et I nc om e M ar gi n %

Continued execution ofenlarged subseaorderbook

Operational issues

Relates to disposal of Ezion

shares, fair value changes onderivatives, gain on sales onvessels (sale-and-leaseback)and gain on dilution of stake in

Accrual of dividends onperpetual securities


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Company Focus

Ezra Holdings

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Quarterly / Interim Income Statement (US$ m)

FY Aug 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013Revenue 266 326 279 247 317

Cost of Goods Sold (221) (253) (229) (205) (315)Gross Profit 44 73 50 42 2Other Oper. (Exp)/Inc (33) (41) (33) (34) (40)Operating Profit 12 31 17 8 (37)Other Non Opg (Exp)/Inc 8 (6) 0 1 (6)

Associates & JV Inc 0 0 2 8 6

Net Interest (Exp)/Inc (9) (10) (9) (9) (11)

Exceptional Gain/(Loss) 18 2 4 32 65Pre-tax Profit 28 18 14 40 16Tax (6) (11) (6) (7) (7)

Minority Interest 0 0 (1) (3) (2)Net Profit 22 7 7 30 7Net profit bef Except. 5 5 3 (2) (58)

Preference Dividend 0 0 0 0 0Net Pft (Pre-Ex, Aft PrefDiv) 5 5 3 (2) (58)EBITDA 32 42 33 18 (24)

GrowthRevenue Gth (%) 25.4 22.9 (14.6) (11.3) 28.3

EBITDA Gth (%) 322.4 28.6 (20.0) (47.0) nm

Opg Profit Gth (%) 229.6 172.5 (46.2) (49.8) nm

Net Profit Gth (%) 1.4 (67.6) (6.8) 338.6 (75.8)

MarginsGross Margins (%) 16.7 22.3 17.9 17.1 0.7

Opg Profit Margins (%) 4.3 9.6 6.1 3.4 (11.8)

Net Profit Margins (%) 8.4 2.2 2.4 12.0 2.3

Balance Sheet (US$ m)FY Aug 2010A 2011A 2012A 2013F 2014FNet Fixed Assets 613 996 1,167 1,304 1,361Invts in Associates & JVs 153 222 145 159 174

Other LT Assets 149 281 368 368 368

Cash & ST Invts 187 116 133 368 293Inventory 23 60 89 107 111Debtors 206 302 439 496 540Other Current Assets 100 177 392 392 392Total Assets 1,431 2,152 2,734 3,194 3,239ST Debt 207 294 607 437 437

Creditor 17 71 120 149 154

Other Current Liab 142 260 300 301 287

LT Debt 448 637 639 1,099 1,124

Other LT Liabilities 23 41 57 57 57

Shareholders Equity 593 848 1,011 1,145 1,171Minority Interests 1 1 0 7 9Total Cap. & Liab. 1,431 2,152 2,734 3,194 3,239Non-Cash Wkg. Capital 169 207 500 546 602

Net Cash/(Debt) (467) (815) (1,112) (1,167) (1,267)

Debtors Turn (avg days) 200.5 165.6 137.4 146.5 145.8Creditors Turn (avg days) 21.7 38.5 46.6 50.8 55.1Inventory Turn (avg days) 21.1 36.4 36.4 37.1 39.8Asset Turnover (x) 0.3 0.3 0.4 0.4 0.4Current Ratio (x) 1.4 1.0 1.0 1.5 1.5Quick Ratio (x) 1.1 0.7 0.6 1.0 0.9Net Debt/Equity (X) 0.8 1.0 1.1 1.0 1.1Net Debt/Equity ex MI (X) 0.8 1.0 1.1 1.0 1.1Capex to Debt (%) 44.1 29.9 21.2 11.9 6.3

Z-Score (X) NA 0.9 0.9 1.1 1.1Source: Company, DBS Vickers

Revenue Trend

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

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100

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200

250

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350

2Q2011

3Q2011

4Q2011

1Q2012

2Q2012

3Q2012

4Q2012

1Q2013

2Q2013

3Q2013

Revenue Revenue Growth % (QoQ)

Asset Breakdown (2012)Net Fixed

Assets -59.1%

Assocs'/JVs -7.4%

Bank, Cashand Liquid

Assets -6.8%

Inventory -4.5%

Debtors -22.3%

Includes US$67m gain on saleof remaining stake in Ezion

Refinancing short term debt

to longer term debt

Includes perpetual securitiesissued in Sep 2012


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Company Focus

Ezra Holdings

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Cash Flow Statement (US$ m)FY Aug 2010A 2011A 2012A 2013F 2014FPre-Tax Profit 80 52 87 73 45

Dep. & Amort. 12 29 50 46 49

Tax Paid (5) (12) (12) (19) (20)Assoc. & JV Inc/(loss) (13) (11) (5) (13) (15)

Chg in Wkg.Cap. (52) (88) (137) (46) (43)

Other Operating CF (8) (13) (44) 0 0Net Operating CF 14 (44) (61) 40 16Capital Exp.(net) (289) (278) (264) (182) (99)

Other Invts.(net) 22 9 42 0 0

Invts in Assoc. & JV (20) (17) (2) 0 0

Div from Assoc & JV 11 0 1 0 0

Other Investing CF (45) (49) (43) (6) (6)Net Investing CF (321) (335) (266) (188) (105)Div Paid (7) (9) 0 0 0

Chg in Gross Debt 347 200 251 270 25

Capital Issues (3) 115 95 0 0

Other Financing CF 0 (1) (2) 113 (11)Net Financing CF 336 305 344 383 15Currency Adjustments (3) 3 0 0 0

Chg in Cash 26 (71) 17 235 (75)

Opg CFPS (US cts.) 9.4 5.1 7.8 8.8 6.0Free CFPS (US cts.) (39.2) (37.1) (33.2) (14.5) (8.5)Source: Company, DBS Vickers

Capital Expenditure

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2010A 2011A 2012A 2013F 2014F

Capital Expenditure (-)

Target Price & Ratings History

S .N o . D a te C l o s i n gP r i c eT a r g e tP r i c e R a t i n g

1: 06 Dec 12 1.08 1.30 Buy

2: 08 Jan 13 1.28 1.30 Buy

3: 15 Jan 13 1.21 1.58 Buy

4: 21 Jan 13 1.17 1.58 Buy

5: 15 Apr 13 1.05 1.56 Buy

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

0.85

0.95

1.05

1.15

1.25

1.35

Jul-12 Nov-12 Mar-13

S $

Source: DBS Vickers

Perpetual securities

Remaining portion ofLewek Constellation plusbuyback of some vessels


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Company Focus

Ezra Holdings

Page 7

DBSV recommendations are based an Absolute Total Return* Rat ing system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends

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GENERAL DISCLOSURE/DISCLAIMERThis report is prepared by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities(Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is

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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers toDBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressedare subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this documentdoes not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This documentis for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtainseparate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given inrelation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is awholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time totime have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/oremployees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking,

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(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein.

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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or researchdepartment, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any USpersons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in anysecurity discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about thecompanies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/hercompensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 15 Jul 2013,

the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securitiesrecommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).


8/8

Company Focus

Ezra Holdings

Page 8

COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as

of 11 Jul 2013.

2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-

dealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of15 Jul 2013.

3. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA have received compensation, within the past 12 months,

and within the next 3 months receive or intends to seek compensation for investment banking services from EzraHoldings.

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investmentbanking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain furtherinformation, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussedin this document should contact DBSVUSA exclusively.

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Ezra Holdings 2013 July 15 by DSVB

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