Ezra - Additional charters reinforce strength in core operations

Ezra announced that it has secured new and renewal charter contracts worth US$152 mn for three Anchor Handling, Towing and Supply Vessels (AHTS). Under the agreements, the vessels will be chartered out for operations in Southeast Asia for periods ranging from 5½ to six years, inclusive of extension options. We believe the group's young deepwater fleet (about 78% of Ezra's fleet is deepwater capable) places them in a strong position for further new contract wins. The AHTS vessels are basic workhorses of the offshore oil & gas support services industry that are deployed throughout the entire oil field life cycle. Ezra has an existing modern fleet of 25 AHTS and 3 crew boats within the Offshore Support Services division (original core business of the group).

With recent signs of recovery from the financial turmoil, the group foresees upward revisions in capital expenditures by global oil majors, driving strong demand for offshore support services. This is in line with our positive view on the O&M/offshore services sector, especially in the subsea space.

Ezra's recent new growth strategy announcement on the subsea market marks a strategic and transformational move to focus on one of the fastest growing segments of the O&M sector. Global subsea spending in the next five years should rise >70% over the previous five years. Subsea spending should total about US$160bn from 2009 to 2013, and 3,222 subsea trees are due to be installed during this period. With its upcoming high specification vessels, enhanced know-how and expertise, and good execution track record, Ezra should be in a strong position to benefit in our view. We maintain our Buy on Ezra for its attractive valuations, strong execution track record, and its move into the high growth subsea market.

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CH Offshore: Deeply undervalued cash

AHTS fleet with deepwater focus. CH Offshore (CHO) owns and operates eight small AHTS (<8,000>12,000 bhp) as of end FY09 (FYE June). CHO will increase its fleet of large AHTS to seven by end FY10.

Strong free cash flows amidst steady earnings growth. We project CHO’s free cash flow per share to rise to 8.5 US cents in FY11 (or equivalent to c. 22% of current share price), vs. 2.5 US cents in FY09 and an estimated 1.1 US cents in FY10. This is due to: 1) Non-existence of committed capex after FY10, and 2) our forecast of 7% net profit CAGR in the FY10-11 forecast periods.

6.5% current FY10 dividend yield. We expect CHO to have 40% dividend payout, vs. recurring net profits, in the FY10-11 forecast periods. The 22% dividend payout in FY09 amidst uncertain economic condition is an anomaly.

Sustained undervaluation could trigger M&A interest. CHO now trades at 6x recurring FY10 PE (FYE June), vs. 9x average PE for the small-mid cap offshore service providers in our coverage. CHO is also not seen as a core holding for Chuan Hup, its second largest shareholder. Hence, in our opinion, an undervalued CHO may be an attractive M&A target for global AHTS owners, including John Fredriksen’s Deep Sea Supply (which has close to 5% stake in CHO).

Initiate coverage with BUY. Our fair value for CHO is S$0.89, based on 9x blended recurring FY10/11 PE (FYE June). This gives around 58% potential upside from current price. We initiate coverage on CHO with a BUY rating.

Rickmers Maritime - 2Q09: Retaining cash to weather challenges ahead

RMT reduces distribution policy from 46% to 13% for financial flexibility and declares DPU of 0.6 US cents. While fair price of S$0.76 is 30% above current price, we maintain HOLD in view of the US$712m unfunded capex.

Rickmers Martime (RMT) posted a net profit of US$5.2m for 2Q09 (-43% yoy; -53% qoq). The fall in earnings was mainly due to the provision of US$7.5m for asset impairment charged for a vessel (Maersk Djibouti) as the charterer, Maersk Line, may exercise an early termination option. The impairment also takes into account the likelihood of a fall in charter rates in 2010. Excluding the provision for impairment, 2Q09 earnings would be US$12.7m (+38% yoy; +15% qoq). According to management, this is the only vessel in RMT’s fleet that has an early termination option.

The trust’s income available for distribution amounts to US$19.6m (+42% yoy). RMT is paying DPU of 0.6 US cents, or 13% of distributable cash flow (1Q09: 46%). A reduction in its payout ratio is mainly to conserve cash for financial flexibility amid uncertainties in the container shipping market.

To date, RMT has a fleet of 16 containerships time chartered out for periods of between seven and 10 years. Three more 4,250-TEU newbuilds, contracted to Hanjin Shipping, are expected to join its fleet. Of these, two are scheduled for delivery in 2H09 and one in 1Q10. RMT is evaluating options for the funding of four 13,100-TEU container vessels worth US$712m to be chartered out to Maersk in 2H10. These vessels have secured 10-year charter contracts at a daily time charter rate of US$56,941. The trust is also seeking to re-finance a US$130m loan facility due in Apr 10.

While our fair price of S$0.76 is 30% above its current share price, we maintain our HOLD recommendation in view of RMT’s unfunded US$712m capex due in 2010. Our fair price is based on 2010 P/B of 0.4x, similar to US peer Danaos’ P/B of 0.4x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.