Ezion Holdings Ltd - US$55m contract to support LNG project in Australia (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.67

Fair Value: S$0.86

Awarded initial project worth US$55m. Ezion Holdings (Ezion) announced on Monday that it has been awarded an initial project worth about US$55m to provide full logistics and support services for the haulage of equipment and modules for the development of LNG facilities on Curtis Island, Queensland, Australia. The project is scheduled to commence in mid 2012, and we expect it to run for about 16 months.

Successful execution may mean more contracts. This LNG facility is the first out of eight proposed in Queensland, and is expected to have an initial capacity of 7.6m tones per annum (Mtpa). The Queensland government has estimated that 50 Mtpa of LNG could be produced from the Surat and Bowen Basins in Queensland that could be piped to the coast for export. Besides the earnings contribution from this contract, this is an important project for Ezion as successful execution may lead to further business opportunities for the group, for instance supporting the other LNG projects that are slated to come up in Australia.

Major LNG developments coming up. On 28 Jul, the board of Australia Pacific LNG (50-50 JV between Origin Energy and ConocoPhillips) announced that it had approved the development of one of Australia's largest LNG export projects on Curtis Island, providing an immediate trigger for the development and construction of project facilities, in which Ezion is a beneficiary. The approval will result in investment in the first phase of the project of US$14b to service the sale and purchase agreement with Sinopec Corp for 4.3 Mtpa - the largest single LNG sales agreement by annual volume ever signed for delivery from Australia.

Details about the contract. According to management, Ezion will provide about five pairs of tugs and barges for this initial project, with some chartered in and the rest built at yards in SE Asia. Capex required (excluding chartering costs) is estimated to be around US$40m, and we estimate that about 70% of this will be funded by debt. We assume net profit margin of about 20% (relatively lower as the vessels are on time charter, rather than bare boat arrangement). We have adjusted our earnings estimates after taking into account this latest development and based on 10x blended FY11/12F core earnings, our fair value estimate rises to S$0.86 (prev. S$0.79). Maintain BUY.