May 15, 2017

Ezion Holdings (Ezion) reported headline net loss of US$12.7m for 1Q17 as forewarned, due to a depreciation of the USD against the SGD. Excluding the forex loss of US$13.3m, a core net profit of US$0.5m was reported.

The weaker core earnings in 1Q17 was due to a decline in revenue (-16.4% yoy, – 5.6% qoq) as number of vessels fell by one to 14 (4Q16: 15 vessels), coming within our expectations before its operational ramp-up in 2Q17.

Despite the weak bottom-line performance, EBITDA was US$40.4m in 1Q17 (-22.3% yoy, -5.9% qoq), lower due to the loss of revenue of one vessel coming off work. Core EBITDA margin level was comparable on a qoq basis at 58.9% (4Q16: 59.1%, 1Q16: 63.4%).

Net gearing crept up to 100% in 1Q17 (4Q16: 98%), largely due to currency translations and lower equity base in 1Q17 vs 4Q16. For 1Q17, Ezion made a net debt repayment of 1.5% of gross debt as Management intends to continue paring down debt over coming quarters.

Of 26 vessels delivered, Ezion expects to have two more vessels deployed by 1H17: one in China (Unit #24) and the Middle East (subject to outcome of ongoing negotiations). Ezion targets to deploy another five more vessels by end 2017, bringing total deployments to 21.

Quarterly core profit of US$0.5m is at historical low. Assuming no addition of units working in 2Q17, the mobilisation costs for Unit #24 (China), estimated as a one-off expense of US$3m, will likely swing results into a quarterly loss. It is uncertain whether the operational recovery will generate earnings as previously anticipated as dayrates now appear to stay lower for longer, while existing charters could face dayrate resets on re-tendering.

We have revised our earnings, assuming a successful execution of its revised deployment plans. Our revised core earnings over 2017-19 are US$10m (-66%), US$11m (-67%) and US$16m (-61%) respectively.

Ezion had previously guided for an operational recovery to take place within 2Q17 though it appears the risk of operational recovery slipping into late-2H17 is high, as situation on ground is fraught with uncertainties, and recovery protracted. Situation’s fluidity renders any guidance out of date in a matter of weeks, and we are concerned that the current guidance will change again in the coming quarter.

Given the multitude of operational factors impacting guidance despite the improvement in the oil price, we opt to err on the side of caution. Downgrade to HOLD, TP lowered to S$0.33, benchmarked to 0.5x 2017F P/B, as we re-instate our 20% discount. Entry price: S$0.28. –UOB

Ezion closed at: S$0.295