Ezra - Pushed back project commencement date of EOC’s Thailand FPSO

Monday, July 6, 2009

We maintain our Sell/High Risk recommendation. While recent S$92.4mn share placement will improve balance sheet strength, we deem Ezra’s earnings in FY10-11 as riskier and possibly lumpy as growth will come from yard order book fulfillment (we note no new orders since May-2008), and energy services (high operating leverage as equipment are bareboat chartered-in). Additionally, there is a risk of over-paying for potential acquisitions or slower than expected integration of acquisition target. Valuations are also unattractive – current core business forward PE of 11x is above the industry average of 7x.

Our target price of S$0.95 is based on a sum-of-the-parts valuation, comprising S$0.61/share from Ezra's core business based on 6x FY-Aug-10E PER, S$0.24/share from Ezra's 48.9% stake in Oslo Bors-listed EOC Limited, based on 3.5x Feb-10E EOC earnings and adjusted for Ezra's stake, and S$0.09/share from Ezra's 15.5% stake in SGX-listed Ezion Holdings (based on market value).

We use PER to value Ezra's core businesses as we believe investors will shift focus to the quality of Ezra's near-term earnings instead of the company's asset growth. Our target PER of 3.5x FY-Aug-10E is at ~15% discount to industry average of 7x. While earnings visibility from Ezra's long-term charters would justify a premium to industry PER, this is more than offset by earnings volatility which may persist due to: i) FX fluctuations; ii) greater proportion of revenues from lump-sum projects (e.g. yards, energy services) where margins and execution time-frame (hence revenue recognition) are less predictable. Valuations may stay depressed as a result.

Our target PER of 3.5x for EOC implies ~65% valuation discount to other offshore construction and production peers, justified by EOC's poorer than expected execution of the Thailand FPSO project, potential heavy capex for its Vietnam FPSO project (assuming it wins), and potential one-off charges to be incurred from project delays or inability to secure financing for Vietnam FPSO.


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