Ezion Holdings (KimEng)

Event:

Ezion continues to develop its liftboat business with two project-specific contracts in the last three months and the ongoing delivery of its newbuilds. Its improved capital structure allows it to take full advantage of the opportunities that its liftboat business provides. We maintain our BUY recommendation and target price of $0.99.

Our View:

The partial divestment of one liftboat and the outright sale of another over the past year has lightened Ezion’s asset base and improved its financial structure significantly. As of its 1Q11 reporting, the company has a net cash balance of just over US$10m.

This is a much improved capital structure from when Ezion first launched its liftboats. Back then, it raised cash from the issuance of new shares and special purpose financing arrangements, with average interest rates running at around 7% pa and gearing at 0.7x.

Furthermore, due to the pickup in operating cash flow following the successful introduction of liftboats in the market, Ezion is able to enjoy much better terms from financial institutions, and can now fund its new projects with 20% equity or less.

Ezion has modified its approach, as evidenced by its last two liftboat projects. It is also able to convert and refurbish existing jackup rigs to liftboats, according to the operational requirements of clients. This significantly shortens the time to market to as little as seven months. A newbuild, on the other hand, requires a construction time of at least 15 months. Going forward, we see Ezion using a combination of both methods to bring more vessels into its fleet.

Action & Recommendation

Ezion has demonstrated that it has the resources, capability and balance sheet to further build on its liftboat business, which will drive earnings beyond our current three-year forecast core net earnings CAGR of 30%. While core FY11 earnings are muted from start-up costs, FY12 is boosted by liftboat deployments. We reiterate our BUY recommendation and target price of $0.99, based on PEG of just 0.5x or FY11F core PER of 12.5x.