Ezra - Sell: Too Early to Get Excited

Ezra’s management officially unveiled the firm’s growth strategy in an analyst briefing this afternoon. The new strategy involves expanding the suite of services offered so as to provide an integrated service offering to add better value to customers, exploit synergies between its various assets, and enhance market competitiveness. Growth into 2012 will be driven by:

1) Focus on subsea services: A new division, “Deepwater Subsea Services” has been created to provide services such as subsea construction support, system installation, well interventions, maintenance and repair. This new division will deploy the 2 Multi-Functional Support Vessels and 1 heavy-lift construction vessel, all of which will be delivered over the next 12 months. Management says no additional capex is required as the growth strategy involves re-aligning existing assets and enhancing the group’s engineering expertise.

2) Asset-light fleet management — Ezra will also provide management services to asset owners with no operating experience (e.g. hedge funds), with an option to purchase the vessels after a few years of operation. Management revealed that it has been approached by an owner to operate 4 offshore support vessels. Management is also eyeing 2 attractively-priced accommodation barges and is currently exploring off-balance-sheet financing options.

Our view — We believe the growth strategy unveiled today was widely expected by the market and largely conceptual in nature. We think execution risks are high given the relative inexperience of the group in the subsea business, poorer than expected execution record in its first FPSO contract, and keen competition in the subsea business segment.

Not unexpected — We believe Ezra’s new growth strategy had been widely expected by the market. Management had spoken about integrating assets with services in previous analyst briefings. We had also written about this growth direction in our initiation report (see Page 33-34 – Ezra Holdings: Initiate at Buy: Valuation Gaps in this “Good-to-Great” Story dated 22 May 2008).

Challenges — Ezra has limited presence in the target markets for its deepwater services (South America, Africa). Also, competition is intense in these markets. Given the lack of operating experience, initial subsea projects are likely to be bite-sized, low-margin, or with smaller customers, e.g. its maiden US$40+mn Energy Services project with STP Energy at ~13% gross margin.

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