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RHB Research 2015-07-13: Ezra Holdings - Market Ignoring Reduced Solvency Risks. Maintain TRADING BUY.


  • 3QFY15 showed a core USD1.2m loss, which was a significant improvement from 2QFY15’s USD11.6m loss. 
  • Maintain TRADING BUY with a new SGD0.25 TP (56% upside). 
  • We believe the stock has priced in solvency concerns, although such risks have fallen drastically with the rights issue. 
  • The Lewek Constellation’s sale-and-leaseback appears to be the least dilutive funding option to repay the perpetuals. 
  • Ezra has an USD2.0bn/USD8.5bn orderbook/tenderbook. 

 Cash flow improves. 

  • Ezra’s 3QFY15 (Aug) cash from operations was a strong USD77.3m, bringing 9MFY15 cash generated to USD104.5m. Management has been successful in reducing the company’s cash conversion cycle to c.22 days in FY15 from 62 days in FY14. 
  • While core operations face continuing headwinds, leading to muted profitability at the accounting level, we see Ezra embarking on a deleveraging phase as capex falls to replacement levels, with management focusing on improving free cash flow (FCF) generation. 

 Sale and leaseback (SLB) of Lewek Constellation the best option for shareholders. 

  • We see the likely SLB of Ezra’s flagship vessel reducing debt by c.USD400m (vs current total of USD1.8bn), bringing net gearing down to c.97% ex-rights and to c.76% in FY16F post-SLB, from 119% today. 
  • This funding option to repay the USD120m perpetuals, while negative for operating margins, is non-dilutive vs the proposed issue of convertible bonds, and is also preferable to allowing the perpetuals to step up to a c.13% interest level. 

 Bond market has priced in improvements, but equity market has not. 

  • Ezra’s bond yields have fallen, indicating its strengthening financial position and reduced solvency risks post-rights. 
  • The equity market does not reflect this improvement, with the stock continuing to trade at a stubborn 0.3x ex-rights P/BV. 

 Adjusting TP to SGD0.25 (from SGD0.34) for rights. 

  • Adjusting for a larger-than-expected rights ratio, our TP falls to SGD0.25
  • The SOP implies 0.45x P/BV, with key valuation components implying 0.4x/0.6x P/BVs for the subsea/offshore vessels divisions, and 1x P/BV for Triyards (ETL SP, BUY, TP: SGD0.84). 
  • Maintain TRADING BUY. 

 Key risks to our forecasts. 

  • These include order win rates in the coming quarters and margin pressures from a challenging operating environment. 


(Lee Yue Jer, CFA)

Source: http://www.rhbgroup.com/




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