Ezra Holdings - Potential issue of hybrid securities (DBSVickers)

BUY S$0.92 STI : 2,773.17

Price Target : Under review

• Perpetual securities likely to be issued with yield of >6%.

• Higher funding costs but lower interest expense and improved gearing and liquidity ratios a plus.

• Maintain BUY. Numbers unchanged for now, TP under review pending further details.

Potential issue of perpetual securities. Ezra announced that it is considering issuing SGD-denominated perpetual securities. While no further details were unveiled, we understand that this would be similar to that of Hyflux’s recent preference share issue. This would be somewhat of a hybrid instrument – recorded under equity on the balance sheet, but with debt-like features in terms of payment of fixed dividends.

Yield could be >6%. We believe Ezra could look to raise c. US$100m (S$120m) in preparation for redemption by CB holders from Nov 2012 as well as working capital purposes. In terms of pricing, we believe this could be slightly higher than Ezra’s 3-year unsecured SGD-denominated notes issued at 4.78% in May 2010, in line with what we saw for Hyflux (preference share issued at 6% vs. its 5-year medium term note at 3.89%).

Positives vs. negatives. Given the relatively high cost of this form of funding, we are concerned over the lack of clarity at this juncture on the use of these funds – which will be key to determine if Ezra is able to generate a return higher than the cost of capital. As it stands, Ezra’s FY11/12F forecast ROE is low at 5.2%/10.3%. However, on the positive end, this exercise could help reduce debt, and hence interest expense, enhancing EPS (the fixed dividends on the perpetual securities would not be recognized on the P&L). This potential fundraising exercise will keep Ezra’s outstanding debt steady while strengthening the balance sheet, with net gearing currently at 0.99x and projected to hit 1.13x by end FY12.

Divestment plans on the cards but execution could be hampered by execution. Ezra continues to guide that its previously discussed divestment plan remains on track, with potentially c. US$150m of cash to be freed up. However, rising macro risks and the volatile financial markets could serve as potential roadblocks in its execution plans.

BUY maintained; TP under review. We keep our numbers unchanged for now, but put our TP under review pending further details. Notwithstanding, we keep our BUY recommendation on the back of expected sequential earnings improvement and steady subsea order wins momentum.