Ezion - More upside to our target price of S$0.99

Ezion’s key strength is to identify opportunities within the offshore industry, and then to finance, design, procure and modify specialised vessels which it then charters out, at premium margins.

Currently, Ezion derives the bulk of its earnings from ballastable vessels, which serve as support vessels for offshore projects. Going forward, earnings will be boosted significantly by the addition of 4 self-propelled jack-up support rigs (aka liftboats) to its fleet of vessels.

Ezion also recently won an A$350m contract for early-stage work in the development of Western Australia’s massive Gorgon natural gas project. We anticipate more jobs to come from this project, which has an estimated capex of at least US$28bn.

Ezion’s share price has moved up sharply on the back of positive news flow such as the Gorgon contract win. However, we believe its prospects have not yet been fully reflected in its share price. Despite FY09 valuations of 35.9x, PE to Growth is still just at 0.33x. We expect further 28% upside to our target of S$0.99, which is based on 15x FY10 earnings.

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Ezion Holdings: Positive development for Gorgon

Gorgon clears state government regulatory hurdle. It was reported this week that the Western Australian government has granted final state government's environmental approval for the Gorgon project, with the Australian Federal government's approval as the final regulatory hurdle remaining. This is a positive development, as the Gorgon project has been delayed several times in the past years. We believe that the Federal government's approval is a formality, and the market's anticipation of this news could be a near term price catalyst.

Earnings risks still exist, albeit reduced. While this Gorgon project development has reduced a major earnings risk to Ezion, we note that two of the group's four liftboats are still under MOUs. While Ezion has a firm bareboat charter contract with Ezra Holdings for the other two liftboats, the latter has yet to announce firm time charter contracts for these vessels and may still request for vessel delivery delays.

Better-than-expected 2Q09 results. Ezion's recurring net profit came in at S$4.5m (+103% y-o-y) in 2Q09, on revenues of S$21.1m (+195% y-o-y), mainly due to an expanded vessel fleet. The outperformance vs. our estimate of S$3.5m is attributable to greater contributions from the Marine Services division and lower than expected start up costs for the Gorgon project. We have hence raised our FY09 recurring net profit forecast by 18% to S$15.0m to factor in these deviations.

Raising fair value to S$0.94; maintain BUY. On the back of lowered earnings risk from the recent positive newsflow on the Gorgon project, we have pegged Ezion＊s TP to a higher 12x recurring FY10 PE (prev 10x), raising it to S$0.94. Maintain BUY.

Ezion Holdings Limited: High risk, high return

Biggest owner of liftboats in Southeast Asia by 2010. Ezion provides marine logistics and support services to the offshore oil and gas industry, and owns a large fleet of 16 ballastable barges. Ezion will also be the biggest owner of liftboats in Southeast Asia when it takes staggered deliveries of four new generation vessels in the next 18 months.

Liftboats are the biggest earnings driver in FY10. The first 2 liftboats will be delivered between late 2009 and 1Q10, and were already chartered out to Ezra Holdings on firm contracts. The second pair has secured LOIs for deployment to a Middle East-based client. These vessels could generate charter revenue of US$16-17m per vessel per year. Key risks are liftboat delivery delays from yards, and clients’ requests for later commencement dates for their contracts with Ezion.

Gorgon Project may boost industry credibility. Ezion is part of a consortium that has secured from Chevron an initial A$350m worth of marine supply contract for the Gorgon Project off the coast of Australia. Ezion would earn project management fees and income from the supply of 9 offshore vessels to the Gorgon projects. Key risks are postponement in vessel supply requirements and poorer-than-expected execution.

Initiate coverage with a BUY rating. We project Ezion to deliver 106% net profit CAGR over the FY09-11 forecast periods, assuming on-schedule deliveries of vessels. As such, we initiate coverage on Ezion with a BUY rating. Our fair value for Ezion is S$0.76; using 10x fully diluted recurring FY10 PE.

Ezion Holdings – Fund raising exercise for asset acquisition

To raise gross proceeds of S$43.4m through proposed share placement exercise – Ezion is raising gross proceeds of S$43.4m through a proposed share placement of 70m new ordinary shares at 62 cents each, representing a discount of 8.01% to the volume weighted average price of $0.674 traded on June 4. The placement shares represent approximately 10.88% & 9.81% of the Group’s issued and enlarged share capital (excluding treasury shares) respectively.

80~90% of proceeds for acquisition of offshore and marine assets – 80~90% of the gross proceeds, after deducting expenses, will be used for the acquisition of offshore and marine assets while the remaining 10~20% will be channeled towards general working capital. We believe the management is building up its war chest ahead of an earnings accretive project.

Gearing ratio reduced to 0.24x, comfortable financial position – In our view, the share placement exercise reduces the Group’s gearing ratio to 0.24x immediately after the share placement, from 0.65x based on 1Q09 balance sheet. If Ezion were to finance the acquisition of offshore and marine assets through bank borrowings, assuming 80% of S$43.4m gross proceeds raised, gearing ratio would have risen to 0.92x instead. At gearing ratio of 0.24x, we believe Ezion would be in a better financial position to obtain bank financing in the future.

Maintain BUY; Target price of S$0.94 – We are keeping our earnings forecast at this juncture. While earnings per share are expected to be diluted to 8.5 Sg cts as a result of the share placement, we are maintaining our target price of S$0.94, implying a forward PE of 11x FY10F EPS (previously 10x FY10F EPS), in anticipation of earnings accretive projects from the acquisition of offshore and marine assets mentioned in the share placement announcement. With an upside potential of 38%, we maintain our BUY recommendation on Ezion.