Ezra Holdings Ltd - Non-dilutive capital raising (CIMB)

OUTPERFORM Maintained

S$0.92 Target: S$1.55

Mkt.Cap: S$798m/US$663m

Offshore & Marine

Proposes issue of S$ perpetual capital

Ezra is considering an issue of S$-denominated non-dilutive perpetual capital securities, following in Ezion’s recent footsteps. No details have been disclosed but we believe the size could be US$100m-120m, likely a hybrid security. Proceeds could be used for debt repayment, working capital and longer-run capex. The exercise could reduce its net debt ratio to 0.7x (from 0.9x) and add to its earnings from lower interest expense. However, free cash flows could be affected by the high coupon rate (estimated at 6-8%). The shares are trading at 7x CY12 P/E, below the 5-year smallmid-cap average of 11x. No change to our earnings estimates or SOP target price of S$1.55 for now. We continue to see catalysts from subsea contract wins and recovering quarterly results.

The news

Ezra has announced that it is considering an issue of S$-denominated perpetual capital securities. Further details will be announced later.

Comments

What is a perpetual capital security? A perpetual note is a security with no maturity date that is callable at the issuer's discretion. While coupon payments are mandatory, the bond principal does not have to be paid back i.e. the security can be considered as equity and used as leverage with no dilutive effect for shareholders. We believe Ezra’s proposed security is likely to have a hybrid structure, allowing it to qualify as “intermediate” equity credit with a call option at a later date. Ezra is also likely to target high-net-worth retail investors.

Response could be neutral. We believe the reaction to this news could be a neutral one as the positives of non-dilutive and pro-active capital management to reduce net debt could be offset by market perceptions that this is another of Ezra's “innovative” financing avenues. In addition, perpetual securities are still not widely known in the Singapore market with Cheung Kong, Hyflux and Ezion being the first few to tap such instruments.

Potential size: US$100m-130m. We estimate the size of the issue at US$100m-130m (15-20% of its market cap) with proceeds to be used for debt repayment (US$100m convertible bonds due at end-2012), working capital (preparing for bigger subsea contracts) and capex (iced-class vessels). Although such an issue could cost more (with coupon rates of 6-8%), earnings could improve on lower interest expense as well as a lower net debt ratio of 0.7x (from 0.9x). We expect the exercise to be completed by end-2011.

Valuation and recommendation

Maintain Outperform and target price of S$1.55, still SOP-based. The shares are trading at 7x CY12 P/E, below the 5-year small-mid-cap average of 11x. Our net profit of S$46m for FY11 should be achievable with lower losses from subsea, albeit some downtime is expected from the offshore division. No change to our earnings estimates and we continue to see catalysts from subsea contract wins and recovering quarterly results.