Ezion Holdings (DBSVickers)

BUY S$0.645 STI : 3,020.13

Price Target : 12-Month S$ 1.14 (Prev S$ 1.09)

Reason for Report : Raising earnings forecasts, TP

Potential Catalyst: Contract award

Heading North

• Ezion secures 2nd jackup project in 3 months via JV; project worth up to US$73m.

• Project generates 36% ROE and will add 8% to core FY12F.

• Partially offset by removal of South American support vessel contributions; FY11/12F earnings raised 6%/4%.

• Maintain BUY, TP raised to S$1.14.

Second jackup venture. Ezion, along with 50/50 JV partner, Treatmil Holdings, has secured a 2+2 year charter contract to provide a North Sea class accommodation jackup rig to an European oil major worth US$73m. The JV will acquire, refurbish, upgrade and mobilize the upgraded accommodation jackup rig to the North Sea before end FY11.

Earnings to kick in from FY12. We expect this jackup to add US$5.4m/year in associate contributions. With a ROE of 36%, this implies that its capital outlay will be fully recouped by the end of the 4-year contract.

Tweaking FY11/12F by 6%/4%. Ezion has placed a support vessel deployed to a South American client on standby due to a lack of payment. As we await further clarity on this matter, we have removed all earnings contributions from this asset. This impact is offset by adjusting for a robust 1Q11 performance and contributions from latest JV from FY12 onwards, leading to a 6%/4% adjustment to FY11/12F. Note that Ezion has changed its reporting currency to USD from SGD previously.

Maintain BUY, 75% upside to new TP of S$1.14. On the back of our earnings revisions, our TP is accordingly nudged up to S$1.14 (prev S$1.09). We continue to like Ezion for its attractive valuations (FY11/12F PE of 9x/6x) against a solid FY10-12 core EPS CAGR of 47%. This growth is supported by multiple visible drivers as well as a solid execution track record to date. Maintain BUY, with 75% potential upside to our revised TP of S$1.14.

Ezion’s second jackup venture. Ezion has announced its second jackup project in 3 months. Together with JV partner Treatmil Holdings, they have secured a 2+2 year charter contract worth up to US$73m for the provision of a North Sea class accommodation jackup rig to an undisclosed European oil major to support its oil and gas activities offshore Denmark. We suspect this could be Maersk Oil, given its dominance in that region.

This project will be executed via a 50/50 JV company, Atlantic Labrador (Atlantic), which will acquire an existing jackup rig, refurbish, upgrade and mobilize the upgraded accommodation jackup rig to the North Sea before end 2011. The jackup will be bareboat chartered by Atlantic to the Op Co. (which will be separately managed by Treatmil), earning a fixed day rate of US$50k/day.

Old partner with a local presence. Treatmil is an European based offshore service company that provides specialized rig management services to operators servicing the offshore oil and gas and wind industries in the North Sea. Its management team has over 20 years of experience in the European oil and gas market, and has a proven track record of operating and managing North Sea class accommodation jackup rigs. Further, we understand that certain members of Ezion’s management team have previously collaborated with Treatmil, successfully delivering a conversion project for Maersk in 2005.

Project expected to cost a total of US$85m, funding in place. The conversion work is set to commence within the week at a yard in the Netherlands, and is expected to be delivered before end 2011. The cost of the entire project has been estimated at US$85m, which includes the acquisition cost of US$53m for an existing jackup rig, and around US$32m for the conversion (inclusive of a US$2m contingency amount). We understand that around 65% of the total capex will be funded with debt, which has already been secured. The remaining US$30m will be equity funded in equal portions by the JV partners. At US$15m, Ezion can comfortably fund this with its cash horde of US$92.5m.

Converted jackup will be first North Sea class accommodation unit with 100% single-man cabins. The conversion work will result in the rig being converted from a drilling unit to a pure accommodation unit with 140 single-man cabins to meet the North Sea standard. We understand this will be the first North Sea class accommodation unit that will feature 100% one-man cabins.

Conversion work required

• Removal of drilling package

• Conversion of existing cabins to 140 single-man cabins to meet North Sea standards

• Fire fighting equipment in accordance to North Sea standards

• Tubular inspection and repair

• Installation of lifeboats in accordance to North Sea standards

• Engines overhaul

• Cranes upgrades

• Upgrade of all major service equipments to meet the work requirement in the North Sea

Earnings contributions to kick in ~6 months time. We expect this jackup unit, at the Atlantic JV company level, to generate annual net profits of US$10.8m on revenues of US$18.3m, based on our estimates of depreciation and financing costs. With Ezion holding a 50% stake in Atlantic, we expect this to boost associate contributions by c. US$5.4m/year, from FY12 onwards.

Reasonably high ROE despite apparently “low” day rates. The US$73m 4-year contract translates into day rates of US$50k/day. While this rate may appear low vs. the market rates for North Sea jackups, we note that 1) this rig will be utilized purely for accommodation purposes and would not be used for drilling; 2) the jackup is on a bareboat basis. Notwithstanding this, we estimate ROE on this project to be c. 36%, a reasonably high return vs. current group ROE of 30%.

Positives. We view this development positively as it provides another visible stream of earnings to Ezion, with its capital outlay to be fully recouped by the end of the 4-year contract (assuming the 2-year extension option is exercised). Also, with the successful execution of this project, Ezion would have successfully penetrated the North Sea market, characterized by the harsh operating environment offshore and stringent regulatory safety and environmental standards imposed by governments across Northern Europe.

South American supply vessel has stopped contributing to earnings. It has come to our attention that due to a lack of payment from its client, a South American NOC, Ezion has placed the support vessel on standby and is no longer contributing to earnings. Recall that this vessel has been working for this client since early 2009 on an initial 2-year charter worth US$38m. As we await further clarity on this matter, we have in the meantime removed all earnings contributions.

Adjusting numbers for new project, offset by removal of contributions from supply vessel. We have tweaked our recurring FY11/12F up by 6%/4% respectively to US$44.1m/US$66.8m, factoring in 1) a robust 1Q11 that came in 35% ahead of our expectations; 2) associate contributions from Atlantic commencing FY12, and partially offset by the removal of earnings contribution from the South American support vessel. Note that Ezion has changed its reporting currency to USD from SGD previously.

Maintain BUY, 75% upside to new TP of S$1.14. On the back of our earnings revisions, our TP is nudged up to S$1.14 (prev S$1.09), still based on 12x blended FY11/12 PE. We continue to like Ezion for its attractive valuations (FY11/12 PE of 9x/6x) against a solid FY10-12 core EPS CAGR of 47%. This growth is supported by multiple visible drivers, as well as a solid execution track record to date. Maintain BUY, with 75% upside to our revised TP of S$1.14.