Excerpts from analyst's report
Daiwa Capital Markets analyst: Royston Tan
|Still the best of the lot
» Liftboat industry remains relatively resilient
» Plans to take delivery of 12 contracted rigs from 2H15-2016
» Reiterating our Buy (1) call; cutting target price to SGD0.94
What's new: Ezion’s share price has corrected by about 45% YTD, due to a combination of low oil prices from the weak global macro outlook as well as its disappointing 1H15 earnings, in our view.
However, we believe the liftboat industry should remain relatively resilient and that demand for Ezion’s liftboat assets will be maintained at a high level, driven by its customers’ opex requirements that cannot be deferred indefinitely. Ezion’s ability to renew the contracts for 4 out of 5 liftboats that are due to expire in 2015 is a testament to the quality of its liftboat assets, demand for which remains robust.
What's the impact: Increasing revenue contribution due to its larger fleet. We expect Ezion to take delivery of an additional 6 rigs in 2H15 and 6 rigs in 2016, bringing the total size of its fleet to 37 liftboats/service rigs by the end of next year. All its assets have been contracted on a long-term basis (2-4 years). We believe the company’s earnings visibility is what sets it apart from the other oil-services companies, many of which are struggling with low utilisation rates.
EPS forecast revisions. We are cutting our 2015-17 earnings forecasts by 3-30% to account for our lower revenue assumptions. In 2017E, we cut our revenue by 21%, as we now assume that all service rigs will be scrapped at the end of their current charter period, given the relatively old age of these assets (most in excess of 30 years), resulting in a 30% cut to our earnings.
What we recommend: We are changing our valuation method from a PER basis to an SOTP, as we feel that an SOTP is a more appropriate method to account for the entire cash flow generated from its fleet of liftboats/service rigs. As a result, we now have a lower SOTP-derived 12- month target price of SGD0.94 (from SGD1.24).
Also, we now use a DCF to value its main liftboat/service-rig division (PER previously), given the strong cash flow visibility that we see from these assets, which are chartered on a long-term basis. We have changed our key assumptions for the company, and now assume that no new contracts will be awarded to Ezion over 2015-17E vs. our previous assumption of USD75-150m in new order wins for the same period. The key downside risk to our view would be further delays in asset deployment that would impact the company’s overall utilisation and margins.
How we differ: Our 2017E EPS is 16% below the Bloomberg consensus due to our lower revenue and net profit assumptions, as we expect its service rig contracts to not be renewed. But our 2015-16 EPS are 8-15% above consensus due to our higher revenue forecast, on the back of our higher expected utilisation for its incoming liftboats.