Ezion Holdings Ltd - Results in-line; proposes perpetual capital securities (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.67

Fair Value: S$0.79

2Q11 results within expectations. Ezion Holdings (Ezion) reported a 7.3% YoY rise in revenue to US$26.3m and a 3.6% increase in net profit to US$12.2m in 2Q11. Though 1H11 net profit formed 60.7% of our full year estimate, core net profit of US$23.0m accounted for 52% of our full year estimate. Net profit was higher due to additional contribution from its fleet of liftboats and offshore logistics vessels in Australia. Operating margin remained decent at 41.0%, though lower than 2Q10's 48.4%. The group's balance sheet also looks healthy with low net gearing of 0.18x and interest coverage ratio of 34.3x.

Lower contributions from marine services. Revenue was higher due to increased contributions from the chartering of the group's liftboats, as well as the deployment of additional vessels in Australia to support the operations of the Gorgon gas field. Contribution from marine services (tends to be more adhoc in nature) was low, estimated to be around a couple of million in 1H11's US$47.8m revenue figure.

Capital raising exercise. However, the market is likely to focus on the group's proposed issue of SGD denominated perpetual capital securities. Based on the group's historical preference for fund raising methods and capital structure, this is likely to be a hybrid security. Though the group's net gearing is currently low and it can afford to take on more debt, we believe that management is leaving some room for debt in the future to finance additional liftboats in its newbuild programme. DBS Bank has been appointed as the sole lead manager and bookrunner of the offering.

Updates on liftboats. Ezion's 5th liftboat is now expected to be deployed in early Feb next year, due to equipment delay. Although we were expecting the 5th liftboat to be completed in 4Q11 previously, we had modeled in another quarter's delay to be conservative. As for the 6th liftboat, management expects it to be delivered around early Apr next year.

Maintain BUY. We have lowered our FY11 revenue estimate by 9% due to lower assumptions for marine services, but our net profit estimate falls by only 2.8% as marine services generally has significantly lower margins than Ezion's other business segments. Coupled with continued weakness of the US dollar, our fair value estimate falls from S$0.84 to S$0.79. Maintain BUY.