R e g i o n a l M o r n i n g N o t e s Monday, 27 October 2014 COMPANY RESULTS HOLD (Maintained) Ezra Holdings (EZRA SP) 4QFY14: Share Price Turnaround Is Contigent On Emas AMC And EOL 4QFY14 results were within our expectation. We cut our FY15-16 earnings forecasts by 17-34% and lower our target price from S$1.36 to S$0.94. While Ezra is deep in value, an earnest turnaround in its share price can only come about when Emas AMC and EOL deliver a clear earnings pick-up. Maintain HOLD. Entry price: S$0.80. S$0.83 S$0.94 +13.3% S$1.36) COMPANY DESCRIPTION 4QFY14 RESULTS Year to 31 Aug (US$m) Revenue Gross Profit Operating Profit Pre-tax Profit Tax Minorities Net Profit Gross Margin (%) Op. Margin (%) Share Price Target Price Upside (Previous TP 4QFY14 445.9 63.3 24.4 16.9 (4.1) (1.9) 11.0 14.2 5.5 yoy % chg +6 (15) (3) (22) (51) (45) +10 -3.7ppt -0.5ppt FY14 1,488.3 226.9 76.8 74.7 (20.7) (8.7) 45.3 15.2 5.2 yoy % chg +18 +34 (29) (19) (27) (16) (16) +1.8ppt -3.4ppt Ezra Holdings is an owner-operator of offshore support and construction vessels. In 1Q11, it completed the strategic acquisition of deepwater subsea construction company, Emas AMC. Remarks on FY14 Subsea revenue +32% yoy Subsea turned around from a loss, but OSS and marine segments posted lower earnings STOCK DATA GICS sector Bloomberg ticker: Shares issued (m): Market cap (S$m): Market cap (US$m): 3-mth avg daily t'over (US$m): Source: Ezra Holdings Ltd, UOB Kay Hian RESULTS • Within our expectation. Net profit was US$11.0m and US$45.3m for 4QFY14 and FY14 respectively, in line with our net profit forecast of US$45m for FY14. • Higher revenue due to subsea services. Revenue increased by 18% yoy to S$1.5b in FY14 due to higher revenue posted by the subsea segment. Subsea revenue increased to US$1,040b in FY14 from US$797m in FY13. This offset the lower revenues from the offshore support services (OSS) and marine segments. Revenue from OSS declined from US$285m to US$260m while marine revenue fell marginally from US$189m to US$188m. FY14’s lower OSS revenue was due to lower revenue from two leased-in vessels which were returned to their owner during FY14. In addition, the weakness in the AHT and shallow-water PSV segments and the transfer of two vessels from the OSS for use in the subsea segment also contributed to the OSS revenue decline. • Higher gross profit for FY14. Gross profit increased by 34% to US$227m with gross margin improving from 13.4% to 15.2%. The subsea turned around from a loss in FY13 which was affected by a one-off cost resulting from delays in the execution of certain projects, coupled with other unforeseen project costs. Energy EZRA SP 978.8 812.4 636.1 2.8 Price Performance (%) 52-week high/low S$1.48/S$0.735 1mth 3mth 6mth 1yr YTD (14.9) (30.5) (22.4) (33.6) (39.6) Major Shareholders % Lee Chye Tek Lionel 22.7 Aker Solutions 7.4 FY15 NAV/Share (US$) 1.07 FY15 Net Debt/Share (US$) 1.49 PRICE CHART (lcy) EZRA HOLDINGS LTD EZRA HOLDINGS LTD/FSSTI INDEX (%) 130 1.60 120 1.40 110 100 1.20 90 1.00 KEY FINANCIALS Year to 31 Aug (US$m) Net turnover EBITDA Operating profit Net profit (rep./act.) Net profit (adj.) EPS (US$ cent) PE (x) P/B (x) EV/EBITDA (x) Dividend yield (%) Net margin (%) Net debt/(cash) to equity (%) Interest cover (x) ROE (%) Consensus net profit UOBKH/Consensus (x) 2013 1,262 169 109 54 54 5.7 11.4 0.7 13.3 0.6 4.3 101.8 4.4 5.1 - Source: Ezra Holdings Ltd, Bloomberg, UOB Kay Hian Refer to last page for important disclosures. 2014 1,488 149 77 45 45 4.6 14.0 0.6 15.1 0.0 3.0 137.2 3.8 4.1 - 2015F 1,830 187 110 43 43 4.4 14.7 0.6 12.0 0.0 2.4 124.4 4.6 3.7 69 0.63 2016F 2,213 234 144 68 68 6.9 9.5 0.6 9.6 0.0 3.1 124.6 5.7 5.6 92 0.74 2017F 2,570 288 193 82 82 8.3 7.9 0.5 7.8 0.0 3.2 119.7 7.0 6.4 - 80 70 0.80 60 0.60 50 40 30 Volume (m) 20 10 0 Oct 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Source: Bloomberg ANALYSTS Nancy Wei +65 6590 6628 [email protected] Vijay Natarajan +65 6590 6626 [email protected] 17 1 R e g i o n a l M o r n i n g N o t e s Monday, 27 October 2014 EZRA’S FY14 REVIEW AND FY PRIORITIES Source: Ezras STOCK IMPACT • Not out of the woods yet, but Ezra is pushing ahead. The secondary listing of Emas Offshore (EOL) has been completed with EOL acquiring Ezra’s OSS business at US$520m. Ezra now owns 75% of EOL. With the OSS business now under a separately listed entity, EOL will focus on reviving the OSS margins as well as growing the OSS business which had stagnated over the last three years. In addition, EOL will also expand its own offshore accommodation business. • The marine segment under Triyards looks forward to a bright outlook. Demand for liftboats has picked up with Triyards in negotiations for 10-12 liftboat contracts worth US$500m-600m. The recent earnings-accretive acquisition of Strategic Marine’s yards will boost Triyards’ yard capacity and expand its product segment and client base. • However, subsea still needs to achieve a larger orderbook and better margins. Emas AMC’s subsea orderbook currently stands at US$1.2m, of which 60% will be recognised in FY15. With the completion of its game-changer vessel Lewek Constellation in 2Q15, it should enable Emas AMC to achieve a higher orderbook level. However, margins will depend on project execution. Thus far, Emas AMC’s margins have been below those of its peers. EARNINGS REVISION/RISK • Cutting FY15-16 forecasts. We cut our FY15-16 forecasts by 17-34% on the back of lower subsea margins and higher minorities (following the listing of EOL). Through EOL, Ezra now effectively owns 75% of its OSS business which was previously a wholly-owned business. VALUATION/RECOMMENDATION • Maintain HOLD with a lowered target price of S$0.94 which is pegged at 0.7x 2015F P/B vs 1.0x previously. Our recommended entry price is S$0.80. Ezra is deep in value, but an earnest turnaround in share price can only come about when Emas AMC and EOL deliver strong earnings improvement. SHARE PRICE CATALYSTS • Clear earnings pick-up at Emas AMC and EOL. Refer to last page for important disclosures. 18 2 R e g i o n a l M o r n i n g N o t e s PROFIT & LOSS Year to 31 Aug (US$m) BALANCE SHEET 2014 2015F 2016F 2017F 1,488 1,830 2,213 2,570.0 149 187 234 287.7 Deprec. & amort. 72 77 90 94.6 EBIT 77 110 144 193.1 Associate contributions 37 28 28 28.0 (39) (41) (41) (41.0) 75 97 131 180.1 (21) (27) (37) (51.1) LT debt Minorities (9) (27) (26) (47.0) Other LT liabilities Net profit 45 43 68 82.0 Shareholders' equity Net profit (adj.) 45 43 68 82.0 Minority interest Net turnover EBITDA Net interest income/(expense) Pre-tax profit Tax Year to 31 Aug (US$m) 2014 2015F 2016F 2017F 1,594 1,667 1,727 1,782.6 559 581 604 625.9 Cash/ST investment 0 150 169 237.8 Other current assets 1,210 1,360 1,525 1,678.1 Total assets 3,363 3,758 4,025 4,324.4 ST debt 510 567 672 776.7 Other current liabilities 574 843 912 978.0 1,040 1,040 1,040 1,040.3 54 54 54 53.7 1,130 1,171 1,238 1,319.7 56 83 109 156.0 3,363 3,758 4,025 4,324.4 2014 2015F 2016F 2017F Fixed assets Other LT assets Total liabilities & equity CASH FLOW Year to 31 Aug (US$m) Monday, 27 October 2014 KEY METRICS 2014 2015F 2016F 2017F Operating 99 (1) 25 72.1 Pre-tax profit 75 97 131 180.1 EBITDA margin 10.0 10.2 10.6 11.2 Deprec. & amort. 71 77 90 94.6 Pre-tax margin 5.0 5.3 5.9 7.0 (37) (28) (28) (28.0) Net margin 3.0 2.4 3.1 3.2 Working capital changes 0 0 0 (87.5) ROA 1.4 1.2 1.7 2.0 Non-cash items 0 (5) (5) (5.0) ROE 4.1 3.7 5.6 6.4 (10) (142) (163) (82.0) Associates Other operating cashflows Year to 31 Aug (%) Profitability Investing (331) (79) (109) (108.6) Growth Capex (growth) (327) (150) (150) (150.0) Turnover 17.9 23.0 20.9 16.1 Investments 0 0 0 0.0 EBITDA (11.7) 25.4 25.3 23.0 Proceeds from sale of assets 6 80 50 50.0 Pre-tax profit (19.1) 29.9 34.8 37.7 Others (10) (9) (9) (8.6) Net profit (15.6) (5.0) 58.1 20.6 Financing 187 56 104 105.0 Net profit (adj.) (15.6) (5.0) 58.1 20.6 (5) (2) (2) 0.0 EPS (18.5) (4.8) 55.8 20.0 0 0 0 0.0 Dividend payments Issue of shares Proceeds from borrowings 404 150 400 400.0 (225) (93) (295) (295.0) 13 0 0 0.0 Net cash inflow (outflow) (45) (24) 20 68.5 Beginning cash & cash equivalent 173 174 150 169.3 0 0 0 0.0 129 150 169 237.8 Loan repayment Others/interest paid Changes due to forex impact Ending cash & cash equivalent Refer to last page for important disclosures. Leverage Debt to total capital 56.7 56.2 56.0 55.2 Debt to equity 137.2 137.2 138.3 137.7 Net debt/(cash) to equity 137.2 124.4 124.6 119.7 3.8 4.6 5.7 7.0 Interest cover (x) 19 3 R e g i o n a l M o r n i n g N o t e s Monday, 27 October 2014 Disclosures/Disclaimers This report is prepared and/or distributed by UOB Kay Hian Pte Ltd (“UOBKH”), which is a holder of a capital markets services licence and an exempt financial adviser in Singapore. 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