Ezra Holdings - 3Q09 results: Positive earnings momentum

Results in line, resilient dayrates: 3Q09 net profit of US$18.8MM (+8% Y/Y) was in line with our expectations, bringing 9M09 earnings to US$43MM (+33% Y/Y, excluding EOC divestment gains). Blended dayrates continue to stay firm at about US$2/BHP, and we note that 4-5 vessels are due for charter renewal in 2010, providing potential upside for FY10E earnings should they achieve higher charter rates.

Updates at EOC: FPSO Lewek Arunothai is under commissioning and is expected to make significant contribution by 4Q09 (next quarter). On the other hand, we have also highlighted in our Alert dated 17 April 2009 that its other FPSO project might not materialize. According to an Upstream article on 11 June 2009, the deal with Premier had indeed fallen through as EOC was unable to secure the US$400MM funding for the conversion of the FPSO.

Cash flow and gearing: Ezra’s operating cash flow remains negative at –US$42MM due to the change in sales mix. Collection at the Marine Services division is based on milestones and collection period of the Energy division tends to be longer than the other divisions. Gearing is about 43%. However, this excludes the S$92.4MM (~US$63MM) raised from the recent 78MM shares placement. Factoring that in, gearing will decrease to a more comfortable 29%, based on our estimates.

Maintain Neutral, raise Jun-2010 PT to S$1: We removed the previously assumed 20% collapse in terminal year free cash flow in our valuation of the offshore chartering business given the resilient dayrates enjoyed by Ezra’s young fleet (average: 3 years). Potential upside risk to earnings could come from better-than-expected charter rates for the 2 multi-function support vessels due to be delivered by 1H 2010, which have yet to be contracted.

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CSE Global: Orders flowing regularly

Significant order wins from the Middle East. CSE Global announced that it recently won four contracts worth a total of S$45m in Saudi Arabia and the United Arab Emirates. As CSE announces only bigger order wins of >S$10m, we believe that the company is on track to secure S$100m new orders each quarter. In 1Q09, CSE secured S$160m worth of new orders, buoyed by the S$58m healthcare win. We maintain our assumption of S$400m non-healthcare order wins for FY09F.

Sound operating cash flow is the key. CSE is expected to generate c.S$12m operating cash every quarter as more payment milestones are reached in 2Q/3Q 09. We estimate S$40m operating cash flow (similar to FY07 level) and only S$3m capex in FY09F. CSE could pay back S$22m of debt to reduce its net gearing to 50%. This leaves S$15m; enough for meeting our forecast dividend of S$13m (DPS of 2.7 Scents), translating to 5.5% yield. Additionally, CSE is expected to convert the majority of its short-term debt (c.S$117m) to a 3-year term loan, providing flexibility in its cash management.

Attractive 35% upside. Our target price of S$0.66 is pegged at 7.5x FY09F PER, attractive compared to the average valuation of 8x PER for mid-tier oil & gas peers.

Ezra Holdings - Sell: Cash Drain Continues

9M09 results below consensus – PATMI at US$40mn is only 66% of consensus FY09E of US$61mn. Operationally, results were in line with our forecasts with 9M09 EBIT at 73% of our full year forecast. We raise our earnings estimates by 7-16% to reflect lower than expected financing costs and higher than expected associate income. However, we remain concerned over three key issues:

1) Earnings volatility – While we appear bullish with FY10/11E earnings estimates at 11%/31% above consensus and imply 47%/29% YoY growth, significant part of earnings growth is from i) yard order book fulfillment (lumpy and lacks visibility), ii) energy services division (high operating leverage), and iii) FPSO contribution (delayed since Aug-08). Earnings growth is likely to be volatile.

2) Balance sheet concerns – High net gearing at 49%-owned EOC (2.4x) remains worrisome. We note that Ezra and EOC’s assets are usually packaged to provide an integrated suite of services. We derive a net gearing of 0.5x after incorporating Ezra’s recent share placement and consolidating EOC’s balance sheet with Ezra; gearing is unlikely to improve when considered together with negative operating cash flows for Ezra’s core business.

3) Cash drain – Cash generation has been deteriorating since 1Q09. Working capital adjustment has been negative since 2Q08.
Maintain Sell – We raise our sum-of-the-parts target price to S$1.00 from S$0.95 based on our earnings revisions. We use 6x FY-Aug-10E P/E (15% below peers) to value the core business.