Excerpts from analyst's report

150_1Lee-YuejerOSK-DMG analyst: 
Lee Yue Jer, CFA

Ezra’s 4QFY14 (Aug) PATMI was USD11.0m (+10% YoY, +30% QoQ) but its core net profit to shareholders grew slower at 8% QoQ. Its net gearing hit 120% with the delivery of the Lewek Constellation. Management targets a lower net gearing and a return to positive free cash flow by 4Q15 – but with margins and ROE still firmly below that of its peers. Maintain NEUTRAL, as we trim our SOP-based TP to SGD0.85 (2.3% upside) from SGD1.25.

Core profitability improved but was disappointing again. Ezra’s FY14 core earnings met 87% of our already-conservative estimate. Revenue growth was strong, at 18% YoY, with its subsea arm making progress towards the normal profitability levels of the industry.

Net gearing should have peaked. Its net gearing hit 120% with delivery of the Lewek Constellation, a USD450m vessel, into Ezra’s fleet. The vessel completed her maiden heavy-lift job and is now in the docks again for the installation of a reel-lay system. Upon completion of the job in Mar 2015, there is at least six months’ worth of construction jobs queued up – which should continue to drive subsea earnings in FY15. With all of Ezra’s divisions now profitable and a lower yearly capex of c.USD150m (vs USD336m in FY14), the company’s net gearing should come down – even though it would still be high relative to other offshore companies.

Healthy orderbook should drive topline growth and improve utilisation. Ezra closed FY14 with an orderbook of USD2.4bn, which includes USD520m in charter contracts for its floating production units. This should drive revenue growth in FY15F/16F from the subsea division – especially when the Lewek Constellation begins taking on construction jobs.

Strong growth forecast but poor profitability metrics. While we see Ezra hopefully continuing along the recovery path to drive a 78/40% earnings growth profile over FY15F/16F, we caution that net margins in the 3% range can be easily wiped out by unexpected costs. Ezra’s ROE performance is also poor at 5-6%, below its cost of equity, even with net gearing at 80-100%. We prefer to be invested in high-growth, low-valuation plays like Nam Cheong (NCL SP, BUY, TP: SGD0.58) or Ezion   (EZI SP, BUY, TP: SGD2.45) for exposure to the oil & gas sector.

Recent story:  Chan Kit Whye On EZRA: Burdened With Debt!


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