Ezion Holdings (KimEng)

Event:

Ezion has entered a partnership to provide an accommodation jackup for deployment off the coast of Denmark. This contract, while substantially lucrative on its own, also has the potential to open new doors for more such vessels to be used in the region. We estimate the venture could provide Ezion with over US$5m pa in recurring earnings over the next 20 years. Maintain BUY and target price of $0.99.

Our View:

The new 50:50 JV, Atlantic Labrador, has secured a charter contract with a value of up to US$73.0m over a four-year period to provide a North Sea Class accommodation jackup rig for a European oil major. The JV is incorporated in Singapore with Treatmil Holdings, a Europe-based firm that offers rig management services to the offshore oil and gas and offshore wind industries’ operators in the North Sea.

Atlantic will acquire, refurbish, upgrade and mobilise the accommodation jackup rig before the year-end. The rig is unique in that it is the only vessel that has single-man configured cabins only, for up to 140 personnel. The total cost of this vessel will be around US$85m, with US$53m for an existing rig, US$30m for conversion at a Dutch shipyard and US$2m in contingencies. The JV will have a paid-up capital of US$10m; however, each partner will contribute US$15m in total equity with the balance to be funded by bank borrowings.

The rig is a bareboat charter. With depreciation (over 20 years) estimated at US$4.3m pa and financing costs of around US$2.8m pa, Ezion should be able to generate associate tax-free earnings in excess of US$5m pa from FY12 onwards. Return of equity is estimated at around 35%, ahead of its hurdle rate of 30%.

Action & Recommendation:

We raise our earnings forecasts by 5.5% for FY12 and 8.3% for FY13. Reiterate BUY and target price of $0.99, based on PEG of just 0.5x or FY11F core PER of 12.5x.