Ezion Holdings (EZI SP) - NDR Takeaways ~ Looking for Reasons
Early-cycle beneficiary, maintain BUY
- During our recent NDR with Ezion in Hong Kong, investors appeared to be looking for reasons to build exposure to the oil-service sector.
- Unsurprisingly, their concerns revolved around:
- whether the worst is over;
- asset-write-down potential;
- balance-sheet sustainability; and
- We continue to believe that Ezion will be an early beneficiary in the oil cycle, after oil producers. Maintain BUY and SGD0.42 TP, based on GGM (0.5x FY17E P/BV, 8.5% ROE, 18% COE).
Cancellations, write-downs possibly priced in
- Investors asked about the possibility of asset write-downs and contract cancellations. Ezion said that it is assessing such risks. Its 3Q16 results commentary already hinted at the possibility of its cancellation of future projects that are no longer economically viable. This may dampen earnings growth but is a sensible move to prevent destructive capex and preserve balance sheet, which should be positive in the long run.
- While we do not rule out write-offs, we believe the market has mostly priced these in, after its correction to a 60% discount to book.
- While the sector is still struggling, Ezion observed that its clients are now clearer on their extraction and production road maps. This helps Ezion tailor its assets to suit their requirements, raising the sustainability of future asset deployment. Ezion has mapped out three paths for itself to navigate the downturn. It will:
- continue to diversify into windfarm installation;
- convert assets to mobile offshore production units to serve clients’ longer-term extraction needs; and
- review its capex to ensure value addition.
- It also highlighted plans by the Singapore government to provide financial aid to oil and gas companies.
Catalysts to watch for
- We think that stock-specific catalysts could come from:
- sequential EPS growth from contributions from five new assets by 1H17;
- better receivable collection;
- cashflow relief from any extension of term loans by banks; and
- any government aid to the sector.
- Risks to our forecasts include asset impairment and contract deferments or cancellations.
- Contributions from 22-23 liftboat units by end-FY16 and 27-28 by end-FY17 could lift revenue significantly.
- Diversification into windfarm segment could open up new long-term opportunities and reduce reliance on oil and gas customers.
- Successful restructuring of bank debts could significantly improve cashflows and eliminate refinancing needs for next three years.
- Six service rigs operating in Mexico face risk of cancellation. Clients have been slow in payment.
- Banks withdraw financing support leading to defaults in bonds and debts.