Ezra Holdings Ltd - AMC integration remains on track (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.485

Fair Value: S$1.87

AMC consolidation drags net profit lower. Ezra Holdings (Ezra) reported a 51% YoY increase in revenue to US$164.8m but saw a 75% fall in net profit to US$6.6m in 3QFY11, mainly due to a fall in gross profit margin (17% vs. 31% in 3QFY10), with the consolidation of newly acquired AMC. Administrative expenses also rose 42% to US$16.7m in 3QFY11 with the inclusion of AMC and higher overheads due to the set up of overseas offices. Net profit was lower than expected, but if we were to exclude AMC's net loss in the last quarter, Ezra's 3Q11 net profit would have accounted for about 21% of our full year estimate.

Finally a little more clarity on AMC. We estimate that AMC suffered a loss of around US$7.5m to US$10m in 3QFY11, but management expects the entity to perform better in 4QFY11 (we are expecting just breakeven in 4Q). Much depends on the integration progress and the speed in which third party costs can be eliminated. In particular, management has "realigned a lot of services" that AMC used to outsource, and Ezra aims to bring more of such activities in-house to lower costs. Management also revealed that there was a lack of optimization in vessel utilization in AMC previously, and the group has since reorganized the fleet.

EOC looking at potential listing. EOC, which is listed on the Oslo Bors, is eyeing a second public listing in Asia. We understand that it will be a second primary listing, and not a secondary listing. On the other hand, we do not expect Ezra to issue new shares to raise funds in the next 12 months. Management mentioned that any new significant capex plans will only be in 2013/2014, while capex guidance for 2012 should be around US$150m.

Contract wins may be a catalyst for the stock. With slightly more clarity on the AMC front, we have lowered our earnings estimates for FY11 and FY12, and deem FY12 to be more reflective of the group's earnings after further integration. As such, we roll forward our valuation to 14x FY12F earnings (from blended FY11/12F previously) for the offshore marine and energy business, and our fair value estimate slips to S$1.87 (prev. S$2.05). A potential catalyst would be higher-thanexpected contract wins with healthy margins for the subsea business, which has amassed a decent order book of more than US$300m YTD. Maintain BUY.