• Higher subsea order wins estimate
• Up fair value to S$1.48
• May drop to S$1.40 post
Triyards listingListing fabrication business via dividend in specie
Ezra Holdings (Ezra) recently announced that Triyards, its engineering and fabrication division, has received conditional eligibility to list on the Main Board of the SGX. The listing will be by way of an introduction whereby Ezra is proposing to distribute Triyards shares by way of dividend in specie to Ezra shareholders. In particular, Ezra proposes to distribute 33% of TRIYARDS’ issued ordinary shares (or up to 107.2m shares) on the basis of one Triyards share for every 10 Ezra shares.
Positive on corporate restructuring
Over the years, Ezra has grown from a pure play offshore vessel charterer to a group which also has FPSO operations, engineering and fabrication capabilities, as well as a subsea business. An equity carveout increases information transparency, improving investors’ understanding of the parent’s (i.e. Ezra) firm value. Meanwhile, Triyards would also be able to tap the debt and equity capital markets independently from Ezra to pursue future growth opportunities. As Triyards expands into new markets, Ezra’s offshore support division may also be able to use Triyards as a platform to expand its operations in these new markets.
Fluctuation in Triyards’s price has a small impact on Ezra
Assuming Triyards trades at 9x FY13F earnings with a share price of
S$0.78, we estimate that this would lower our fair value estimate for Ezra from S$1.48 to S$1.40. A fluctuation in Triyards’s share price would not impact Ezra’s share significantly; a 1x change in Triyards’s PER would only impact Ezra’s share price by about S$0.01.
Subsea market outlook positive; up new order wins to US$900m
Meanwhile we estimate Ezra’s subsea net order book currently stands at around US$1.05b, and tendering activity remains buoyant. Given the positive outlook of the industry, we increase our FY13 new order wins estimate to US$900m, raising our fair value estimate from S$1.35 to S$1.48. Maintain BUY.
Subsea outlook positive; increasing order wins to US$900m
We estimate Ezra’s subsea net order book currently stands at around US$1.05b after its 6 Sep 2012 announcement that it has secured a subsea cable installation from ABB (Exhibit 1). Tendering activity for subsea contracts remains buoyant. According to Subsea 7 in its latest financial results, the level of tendering remains strong with improved pricing in the North and Norwegian Seas (Ezra is active in this area). In the Gulf of Mexico, the group sees an increased number of prospects in the medium term as activity picks up. In Asia Pacific, pricing conditions remain more challenging than in other parts of the world, but more projects are expected to be awarded later this year. Technip also confirmed a strengthening in pricing in the North Sea, where capacity is the tightest. Given the positive outlook of the industry, we increase our FY13 new order wins estimate to US$900m, bumping up our earnings estimate by about 8.6%.
Ezra has grown in complexity; “equity carve-out” good for the group
Over the years, Ezra has grown from a pure play offshore vessel charterer to a group which also has FPSO operations, engineering and fabrication capabilities, as well as a subsea business. As such, we view the decision to list the yard fabrication business positively, because an equity carve-out 1 increases information transparency, improving investors’ understanding of the parent’s (i.e. Ezra) firm value. This may be undertaken by companies who believe that the market currently undervalues their equity.
Independent access to capital markets
Following the restructuring exercise, distribution and introduction, the Triyards Group would also be able to tap the debt and equity capital markets independently from Ezra to pursue future growth opportunities. Ezra’s net gearing stood at about 1.0x as at 3QFY12 while that of Triyards was around 0.84x as at 29 Feb 2012.
Sharper focus on core operations, expanding in net markets
The move will also enable Triyards to grow and expand its business independently of the Ezra Group, which will continue to focus on its subsea services and offshore support services divisions. As Triyards expands into new markets, this may in turn benefit certain business segments of Ezra such as its offshore services division by using Triyards as a platform to expand their operations in these new markets. For instance, markets like Brazil have local content requirements for foreign offshore oil and gas services providers to operate in their waters, and having fabrication facilities in these new markets may help Ezra meet these regulatory requirements to operate in these areas.
Fluctuation in Triyards’s price does not have a great impact on Ezra
We value Ezra’s core offshore and subsea businesses with a PER of 13x, along with PER of 9x for its other businesses. Assuming Triyards trades at 9x FY13F earnings with a share price of S$0.78, we estimate that this would lower our fair value estimate for Ezra from S$1.48 to S$1.40 (Exhibits 3 and 4). A fluctuation in Triyards’s share price would not impact Ezra’s share significantly; a 1x change in Triyards’s PER would only impact Ezra’s share price by about S$0.01.
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