Ezra Holdings Ltd: Promising Subsea business; maintain BUY

Fresh segment, new opportunities. With upbeat expectations of the new Subsea business division for Ezra Holdings (Ezra), we sought to better understand its potential impact by looking through the lenses of its peers like Acergy [Not Rated] and Subsea 7 [Not Rated]. Current indications point to similar industry-wide difficulties of capex being put off in the short term but these companies have guided for better mid- to longer-term prospects as National Oil Companies and Oil Majors remain concerned on declining supplies. Order books for these companies remain in the billion dollar region although a significant amount would be recognised through 2010. 2009 was largely devoid of contracts but started to trickle back around midyear. Emerging trends of a larger proportion of charter contracts vs. lump sum contracts were also spotted.

Margin expansion for Energy division. We felt that the key message of gradual margin expansion of the Energy Division (currently 13%) to levels closer to its Offshore Division (high thirties) have not been picked up by the investing community. With higher spec-ed assets, we believe Ezra will be able to accord higher valued services, leading to better financial returns. However, we have taken the conservative option of an unhurried gross margin increment for the Energy division to cater for execution risks.

Changes to revenue contributions. We have swapped the MFSVs, liftboats and the Well Intervention vessel into the Energy Division and revisited at our charter rate assumptions. Ezra's new fleet management program for four smallish AHTS vessels will give them additional revenue with no capex costs. These vessels can also be used internally by Ezra (at cost) to make up for any temporary asset scheduling gaps instead of taking on more expensive spot charter vessels. Moreover, its recent equity placement proceeds of ~S$90m will allow it to grow organically or be used to participate in future bond/equity raising exercises by other companies that are unable to pay/refinance its debt.

Maintain BUY. Ezra remains one of our favourites for the sector with its relatively defensive earnings. Coupled with the low base earnings accretion effect from its fledgling Subsea business, valuations will inevitably be driven upwards if executed well. We have tweaked our SOTP to S$1.75 (previous: S$1.46) based on a reasonable 10x FY10F PER (prev: 8x) for its core business and stronger market value of Ezion. Stronger than expected margin expansion and keen execution will give us a reason to re-look estimates and valuation pegs.

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