Fair value S$1.53
Stock has performed very well for good reason
The stock of Ezion Holdings (Ezion) has performed very well in the past few months, rising more than 75% since early Jun. In comparison, the STI and the FTSE Oil and Gas Index have appreciated by about 12% and 19% respectively over the same period. YTD, Ezion is up about 92%. The good showing has been due to the clinching contracts at attractive rates of return, smooth execution of projects, and commendable quarterly earnings.
1st O&M company to issue perpetual securities
The company recently also proposed a perpetual securities issue (S$125m of 7.8% subordinated perps), and if successfully issued around mid Sep, Ezion will be the first offshore and marine company in Singapore to issue such securities. This projects the strong sense of confidence that management has in the growth of the company. A good take-up of the securities would also reflect investors’ faith in the sustainability of the group’s earnings.
Triyards listing, LNG events also help sentiment
There is also the possibility that the proposed listing of Triyards Holdings has helped sentiment recently due to increased awareness of the self-elevating unit. We also note that the
frequency of news reports and the number of LNG conferences has increased considerably in the past six months as well. Ezion has, and is likely to continue, to be a beneficiary of LNG capex.
Now a S$1b company, but upside potential still there
Ezion Holdings has been our small-mid cap pick since we highlighted it in our year-end strategy report last year, but with a market cap of about S$1b now, it should henceforth be better classified as a mid-cap counter. Looking ahead, we roll forward our valuation with an unchanged peg of 9x FY13F earnings, and our fair value estimate increases from S$1.20 to S$1.53. Maintain BUY with a one-year horizon, but be cautious of a near-term pull back given the recent run-up
Stock has performed very well for good reason
The stock of Ezion Holdings (Ezion) has performed very well in the past few months, rising more than 75% since early Jun. In comparison, the STI and the FTSE Oil and Gas Index have appreciated by about 12% and 19% respectively over the same period. YTD, Ezion is up about 92%. The good showing has been due to the successful clinching of service rigs, liftboats and marine logistics supply contracts at attractive rates of return, continued smooth execution of projects, and quarterly earnings that were above or in-line with expectations.
RECENT EVENTS THAT HAVE BEEN POSITIVE ON STOCK PRICE
1. Perpetual securities issue
1st O&M company in Singapore to issue perps The recent run-up in the stock price is likely partly due to the company’s plans to issue S$125m of 7.8% subordinated perpetual securities (expected to be issued on or around 14 Sep 2012), which projects the strong sense of confidence that management has in the growth of the company. A good take-up of the securities would also reflect investors’ faith in the sustainability of the group’s earnings. Meanwhile, should the issue date of 14 Sep 2012 remain unchanged, this would be the first offshore & marine company to issue perpetual securities in Singapore (Exhibit 1).
Buzz in the debt capital markets recently
We note that companies have been tapping the debt markets recently due to benign interest rates and the relatively less volatile economic environment in recent months. For instance,
1) Ezra Holdings issued S$200m worth of fixed rate notes (FRN) at 5% (due 2015) on 7 Sep 2012,
2) Swiber Holdings issued S$150m of notes at 5.8% with a oneyear maturity in Aug, and
3) Keppel Corporation had a S$300m issue at 4.0% due 2042 in Aug as well.
Raising funds for what purpose?
However, unlike many companies that have issued bonds recently to refinance their borrowings, Ezion’s debt issue is meant to fund investments in offshore and marine assets, besides for working capital. We expect Ezion to continue securing contracts in the service rig business as well as the logistics side in Australia; funds from the perps are likely to be used for financing such purposes. Meanwhile the securities will be classified as equity in the financial statements and will not increase the gearing of the company.
2. Proposed listing of Triyards – helping sentiment
Further raises public awareness of self-elevating unit
There is also the possibility that the proposed listing of Triyards Holdings has helped sentiment on Ezion’s stock due to increased awareness of the self-elevating unit (commonly known as liftboat), in which Ezion is an early adopter of the technology in the Asian region. Triyards has a leading market position in SE Asia for the construction of such units, and our checks reveal that there are indeed hardly any yards in the region that can match the group’s track record in this aspect.
3. Increased interest in LNG in Singapore
More local reports, seminars on LNG in recent months
We note that the frequency of news reports and the number of conferences related to LNG has also increased considerably in the past six months in Singapore. At the end of Aug, SGX also invited analysts and members of the investing community to attend an LNG Shipping Workshop, which is a joint collaboration with the MPA Singapore. The momentum is likely to sustain as Singapore’s 1st LNG terminal is slated for operational start in 2Q13. This may help sentiment on Ezion’s stock as the company has so far, and is likely to continue, to be a beneficiary of LNG capital expenditure – recall that Ezion has clinched marine supply logistics contracts to provide offshore support vessels and services for Australia’s LNG developments. As such projects are done in phases, we think Ezion’s good track record and relationships with key stakeholders put it in good stead to secure more orders.
Now a S$1b company, but upside potential still there
Ezion Holdings has been our small-mid cap pick since we highlighted in our year-end strategy report last year, but with a market cap of about S$1b now, it should now be better classified as a mid-cap counter. Looking ahead, we roll forward our valuation to an unchanged peg of 9x FY13F earnings, and our fair value estimate increases from S$1.20 to S$1.53 as a result. Maintain BUY.
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