Ezion Holdings - Rock bottom valuations (DBSVickers)

BUY S$0.555 STI : 2,774.33

Price Target : 12-Month S$ 0.92 (Prev S$ 1.14)

Reason for Report : Revision in earnings forecasts, TP

Potential Catalyst: Contract awards

DBSV vs Consensus: Below on lower margins

• Recent contract win signifies progression up the value chain as well as gaining further traction in Australia

• Potential funding via perpetual securities could signal robust project pipeline

• High earnings visibility to FY13

• Reiterate BUY, +66% upside to revised S$0.92 TP

Recent US$55m contract win in Australia is significant from several aspects: 1) adds another leg of growth; 2) builds on Ezion’s existing presence in Australia to make further inroads to other projects; and 3) marks Ezion’s progression up the value chain on the execution of this project.

Possible fund raising signals robust project pipeline. With Ezion able to comfortably fund total project capex of US$40m, we believe the potential fund-raising exercise via the issue of SGD denominated perpetual capital securities could signal a robust project pipeline. While this is a relatively more costly source of funds, we are confident that management will deploy these funds to higher yielding projects, enhancing ROE.

Good earnings visibility to FY13; tweaking FY11/12F. Management’s strategy of focusing on the development/production phase and long term contracts underpins stable and growing earnings streams, with good visibility. We estimate that a significant 93%/74%/62% of our core FY11-13F earnings is backed by secured contracts, providing investors with solid earnings visibility. We have raised our core FY11/12F earnings forecasts by 6%/5% to factor in 1) the robust 2Q11 numbers; 2) contributions from the recent contract, to kick in from 2H2012.

Valuations bottoming; reiterate BUY. Along with the general sector de-rating, Ezion has fallen 17% in the past month. At 5x FY12F PE, it trades at -1SD from its historical mean. We believe this is unwarranted given its visible and diversified earnings stream, robust FY10-13 EPS CAGR of 36%, and management’s solid execution track record to date. Maintain BUY, with TP revised down to S$0.92, pegged to a lower 10x (prev 12x) blended FY11/12F PE.