Ezra - Catalysts in hand? Maintain BUY.

Stable/improving rates. Our discussions with offshore support vessel players are turning to "encouraging" vs. "challenging". Despite negotiations, charter rates seem to be holding up relatively well in most cases. For longterm charters signed in 2005-2006 that have lapsing contracts, we believe that rates could even improve.

Fleet management business. Ezra Holdings Ltd has officially launched its vessel operating agreement (VOA), enabling it to drive future returns and growth without any major capital outlay. Under the VOA, Ezra will manage and operate four new anchor handling, towing & supply (AHTS) vessels for an offshore specialist fund in return for a half-share of the profit earned. The vessels are still under construction, with the first AHTS slated for delivery in the 1QCY10. We think US$3.2m in gross profit could be accreted annually when all four AHTS are up and running.

Arunothai FPSO. We understand that the progress to reach its specified gas output has still not hit the mark. As such, the Floating, Production, Supply and Offloading (FPSO) is still off-hire (thus not charging). We have pushed the accretion back to 1Q10, resulting in a small dip in our bottomline estimates.

Chim sao FPSO update. Premier Oil alluded in its 2Q09 results brief that it has narrowed down its negotiations for a FPSO vessel to two parties. Both parties have secured financing for the project. Upstream Online updated that the two sources are Bluewater and EOC. Bluewater turned front runner as EOC could not secure financing. Now with financing in place, EOC has returned as a contender. We expect the decision to be made within 1-2 months as first oil is expected from the field in mid 2011. With the tight timeline, we think the conversion job of a hull could potentially be done in one of the Singapore yards with their on-time, on-budget reputation.

Maintain BUY. We have bumped up our peg for its core offshore division (includes Marine and Subsea division) to 12x (prev. 10x) FY10F PER while maintaining valuation metrics for EOC (6x FY10F PER) and Ezion (market cap). Our fair value heads up to S$2.00 (prev. S$1.75). The delivery of its 12,000bhp AHTS and DP3 construction vessel (in tandem with contract award) in the next 6 months should provide positive newsflow. Maintain BUY.

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Ezra - Vessel operating agreement for 4 AHTS

To operate four new AHTS for an offshore specialist fund: Ezra has entered into a vessel operating agreement with an offshore specialist fund to manage and operate 4 AHTS for an offshore specialist fund. Ezra will receive half-share of the profit earned in return, after deducting direct operating expenses from the charter revenue. Ezra's involvement would be providing the operating crew and securing the charter contract.

First vessel to come on-stream 1Q 2010: All the 4 vessels are under construction at the moment and the first one is expected for delivery in 1Q 2010. The vessels have yet to be chartered out but we believe there should be no difficulty in securing charter contracts for the vessels.

Enhancing returns without capex: This agreement essentially allows Ezra to continue growing its chartering income stream without incurring significant capex. Each AHTS is estimated to cost around US$11- 15MM.

Not new news but could provide short term price catalyst: This announcement is actually not new news as the company briefly mentioned about these 4 potential vessels during its Subsea business plan briefing in July 2009. However, the firming up of the operating agreement now provides greater visibility as far as capacity expansion is concerned, which could provide some share price catalyst.

Ezra Holdings - Positioned for long-term growth

Ezra unveiled its new growth strategy yesterday as well as its long-term plan into 2015. It is setting up a new business segment, a deepwater subsea unit (subsuming its current energy business) to expand as an integrated offshore & marine group.

No additional capex required. Ezra will be leveraging its existing assets, mainly two units of Multi-Function Support Vessels (MFSVs), to be delivered in mid-2010/beginning 2011 as well as a heavy lift construction vessel (delivery 2010) to venture into the subsea segment. Existing capex plans are, therefore, unaffected.

What will Ezra do for subsea segment? To be headquartered in Houston, the US, the new subsea division will expand Ezra’s market reach into the Gulf of Mexico, Brazil and Africa. The type of contracts it will be pursuing will include the installation of Subsea, Umbilicals, Risers and Flowlines (SURF), subsea inspection, maintenance and repair as well as well intervention and drilling (Figures 2 & 3). Management indicated that average day rates for subsea work could range from US$150,000/day to US$300,000/day, depending on duration (from 280 days to five years) and scope of work (term charter or lump-sum project). The subsea market is largely dominated by US and European players (Figure 5) and Ezra will be the first Singapore company to offer a full spectrum of subsea services.

Group revenue to grow by 50-60% by 2015. Management has an overall revenue growth target of 50-60% by 2015, with one-third contributions from the offshore support, subsea and marine divisions respectively. Currently, offshore support dominates Ezra’s revenue, at 60%.

Capacity growth from offshore support and EOC. Ezra plans to add four new AHTS to its offshore support fleet of 25 AHTS/AHT vessels, bringing its total capacity to 279,200bhp by 2011. Its construction and production arm, led by associate EOCL, also plans to increase its fleet with two new accommodation crane barges (300 tonnes, 300 men) within the next five months, via sale and leaseback arrangements or JVs with partners. The barges are likely to be deployed in South-East Asia with average day rates of US$22,000/day-US$30,000/day.

Earnings estimates raised by 4-9% for FY10-11. Our earnings upgrade incorporates: 1) higher day rate assumptions for the two MFSVs from US$80,000/day to about US$115,000/day; and 2) an enlarged fleet for the offshore support and production & construction divisions.

Maintain Outperform; target price raised from S$1.39 to S$1.47, still based on sumof-the-parts valuation, following our earnings upgrade. We see sustainable earnings growth and the ability to secure charters for the new MFSVs as key catalysts for the stock.

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.

Ezra Holdings Ltd: Stable 3Q09 despite stormy environment

Stable 3Q09. Ezra Holdings (Ezra) reported topline growth of 9% YoY to US$59.9m while core bottomline also inched ahead 8% YoY to US$18.8m. On a 9M09 basis, core PATMI (excluding 3Q08 US$136.3m divestment) did better, rising 33% to US$43m. On the whole, Ezra met our expectations and we think that this is a credible performance in view of the overall difficult operating environment.

Lift boats from Ezion gives flexibility. Ezion will be delivering two first-in-class multi purpose self propelled jack up rigs (liftboats) to Ezra from Oct 09 to Mar 10. It will be going into Ezra's Energy Division. We understand that the liftboats are able to substitute the use of 2-3 vessels when providing well intervention services and maintenance of offshore platforms. We expect the liftboats to give Ezra greater deployment flexibility with its current fleet, potentially requiring less in-chartering of vessels on spot rates, which in turn stabilises its gross margin.

Pre-emptive S$89.6m. We understand that Ezra has no concrete plans for the proceeds from the 21 May 09 fund raising exercise. Long-term financing has been secured for its previous capex plans and we think the cash will go towards growing the company through other avenues. With the three divisions growing well, we opine that it would take the route to increase efficiencies intra-group prior to taking a risk with external opportunities at this juncture. With credit markets still frozen, we think that the funds could also be used to participate in future bond/equity raising exercises by other companies that are unable to pay/refinance its debt.

EOC still draggy. EOC's Lewek Arunothai failed to meet our expectations of starting earnings accretion in May 09. We understand that the FPSO has now achieved adequate gas "export pressure" and have formally requested to start billing. We have pushed the FPSO contribution back to start in Jul 09. For EOC's pursuance to provide an FPSO for the Chim Sao field, we view "no news as good news", meaning that it is still in the front running for the project.

Maintain BUY. Ezra remains one of our favourites for the sector with its relatively defensive earnings. In addition, we think its recent placement puts it in good stead to capitalise on any distressed asset situation. We have tweaked our SOTP to S$1.46 (prev. S$1.42) as we see margin improvements for the group as it drives for internal efficiency.

Ezra Holdings: Ahead of the class

Ezra reported headline net profit of US$18.8m (+8% y-o-y) on revenue of US$59.9m, up 9% y-o-y mainly on the back of an expanded vessel fleet. Excluding exceptionals which resulted from 1) insurance claim on Titan 1 of c. US$8m, 2) loss on termination of the Karmsund MFSVs of US$7.1m due to USD/NOK exchange rate differences, and 3) bad debts recovered net of provisions of US$1.4m, recurring net profit is estimated to be US$16.6m (+21% y-o-y, +14% q-o-q), slightly above our forecast of US$15.5m. While gross margins for the respective divisions remain relatively stable, overall gross margins improved 8.1ppt y-o-y to 36.8% due to the relatively greater contribution from the higher-margin offshore division.

Net gearing as of end 3Q09 remained at 0.4x. However, following the recent placement of 78m new shares, we expect Ezra’s balance sheet to be significantly strengthened, with gearing to be reduced to 0.2x by end FY09.

Due to the later than expected start up of EOC’s FPSO, we have pushed back contributions by one quarter to the beginning of FY10. This is despite EOC’s guidance for contributions to kick in in 4Q09. However, our numbers are maintained as we factor in improved operating margins for Ezra in 2H09.

We maintain our BUY recommendation on Ezra, with TP adjusted to S$1.59 as we factor in fair value for Ezion [BUY, S$0.76] in Ezra’s SOTP valuation. The group is due to unveil its forward growth strategies in the second half of July, which may be a potential near term catalyst to look out for.

Ezra - Share placement underway

65 million shares at $1.18-$1.22: According to a Reuters article, Ezra is seeking to raise up to US$53 million through the placement of 65 million new shares at S$1.18-S$1.22 per share. This represents a 6.2% - 9.2% discount to the last close price of S$1.30 (May 20, 2009). The deal has an upsize option of up to 19 million shares, which could raise an additional US$16 million.

Potential dilutive impact of 10%-12%: The deal would have a potential dilutive impact on FY09E EPS by about 10%-12% depending on whether the upsize option is exercised.

Alleviating the working capital strain: While the news highlighted that the cash will be used for capex, debt repayment and possible M&A, we believe that it will primarily be used to fund working capital needs for now as we noted that net cash generated from operating activities was a mere US$259,000 with cash conversion cycle increasing from 100 to 130 days as of 1H FY09. Some of the cash could also be deployed to fund its ongoing capex of US$350 million (2 multi-function support vessels & 1 AHTS for US$275 million and US$75 million for Vietnam yard expansion) but we believe this could be minimal as management has highlighted before that it has secured the required debt financing for the capex.

Gearing: Gearing would potentially come down from 47.1% to between 28.7 and 33.0% post the fundraising.

Valuation impact from the 2 MFSVs: We have not factored in the contribution from the 2 incoming multi-function support vessels to our valuations, which are slated for delivery from 2H 2009 and 1H 2010. With an improved cash position post the placement, Ezra should have no difficulty in taking delivery of these 2 vessels, which could potentially add another 20% to our SOTP.

Ezra : Growth remains visible

Future revenue growth to be less capex driven. Excluding current committed capex, Ezra plans to leverage on its existing capabilities and assets to secure higher value contracts going forward. The need to be less capex-reliant is made more critical on the back of a tight credit market and uncertain outlook.

Still too early to expect contract awards for MFSVs. In our opinion, it is still too early for investors to expect contract awards for the MFSVs in the near term, given that delivery of the group’s first MFSV is expected in 1HCY2010, and the second, in 2HCY2010. Ezra would typically enter into a contract 3 to 6 months prior to the delivery of the vessel to reduce exposure to potential yard delays.

Introducing FY11 numbers. We have introduced our FY11 numbers, projecting net profit of US$89.0m, which represents a 13% y-o-y increase. This will be driven mainly by full-year contributions from 1) the newbuild 12,000 bhp AHTS; 2) the first MFSV; and 3) the 2 chartered-in liftboats. FY11 will also benefit from the expected commencement of contributions from Ezra’s second MFSV in 2Q11.

Raising Ezra’s TP to S$1.45. Based on normalised early cycle valuation metrics for Ezra, vs. trough valuation previously, we have raised Ezra’s TP to S$1.45. This is based on 10x FY09 PE (prev 8x) for its core businesses, but EOC’s valuation is maintained at 6x FY09 PE due to its high gearing, and market price for its stake in Ezion Holdings. Maintain BUY.

Ezra Holdings: Tepid 2Q performance

2QFY09 results within expectations. Ezra Holdings (Ezra) released its 2QFY09 results yesterday. Topline increased by 30% YoY but fell 44% QoQ to US$63m. This was largely due to the decline in contribution from Energy Services (from US$39.9m in 1QFY09 to US$6.4m in 2QFY09) as the previous contract with STP Energy had been completed. The breakdown of revenue was Offshore Support Services (US$43.9m), Marine Services (US$12.7m), and Energy Services (US$6.4m). Core operating profit, excluding forex gain, was US$16.1m, an improvement of 58% YoY and QoQ. Going forward, we expect revenue and operating profit to mirror this quarter’s results.

Need to keep an eye on the receivables. Ezra’s collection period gapped up to 271 days on an annualised basis for 1H09 as compared to 127 days in FY08. Management said this was largely due to the revenue mix which resulted in different receivables’ collection periods. In our view, as Ezra moves to managing new or longer gestation projects, it would be important to keep a tight control. As a result, Ezra’s cash conversion cycle increased from 100 days as at end FY08 to 130 days as at 1H09.

Anchored three AHTS chartering contracts. In addition, Ezra announced new and renewal contracts of three AHTS with charter periods of up to two years valued at US$47m. Our back-of-the-envelope calculations suggested that the chartering rate was at an average of US$2.22 per bhp/day. This rate is slightly higher than the guided US$2 per bhp/day, suggesting that there is still demand for Ezra’s higher capacity AHTS.

Maintain Neutral. We are leaving our FY09 and FY10 estimates intact for now. Given Ezra’s exposure to contingent liabilities arising from sale-and-leaseback financing and a fleet comprising of high capacity vessels, we opine Ezra’s greatest risk is a reduction in chartering rates. Our target price is revised up to S$0.72 (from S$0.45 previously) based on revisions to our SOTP valuation. As Ezra share price has risen 61% in the past month, and given that our assumptions remain intact, we do not find further upsides from current levels justifiable by fundamentals.

Ezra Holdings Ltd: On track for growth in FY09

2Q09 meets expectations. Ezra Holdings (Ezra) reported a 30% YoY rise in topline to US$63m and a 21% YoY increase in bottomline to US$14.9m. However, on a QoQ basis, most of Ezra's divisions registered flattish or decline in revenue contribution, partially due to lumpiness of its revenue. For its main offshore support division, this quarter was flat QoQ as no new vessels were delivered. The group's Marine Division and Energy Division registered 45% and 84% QoQ fall in revenue respectively due to the lumpy nature of revenues. However, as a group, this year will still see bottomline growth. As mentioned in our previous report, forex swings were minimal in this quarter.

Firm charter rates. Ezra announced new/extension of contracts for three of its vessels with rates holding firm. This implies that Ezra's young and deepwater capable assets have a stickiness in its rates unlike older and/or shallow water assets (vessels with BHP < 5000). Currently, only three of Ezra's 30 vessels are 5000BHP but these were built on the basis of very long, fixed rates, time charter projects ranging from 3 to 20 years. Theindustry's current dips in Anchor Handling Tug Supply (AHTS) vessel rates should leave Ezra largely unscathed.

Marine and Energy Divisions. The Marine Division has US$145m in order book to be recognised over the next two years. This division will start to drive synergies within the group as it builds up its repair and maintenance services as well as design and engineering capabilities. Ezra's fledgling Energy Division will not see the same quantum registered in 1H09 as it embarks on smaller projects for 2H09. However, FY10 will see more excitement for this division as it takes deliveries of two self-propelled jack-ups. These will be deployed in high wind or rough sea conditions where even Dynamically Positioned vessels find it difficult to operate.

EOC updates. EOC's net profit of US$10.1m for 1H09 missed our estimates by 12%. Management indicated that this quarter is not a good reflection of EOC's performance due to the mandatory dry docking of one of its vessels and the transition between projects. Its FPSO should also be coming online in May as forecasted.

Maintain BUY. Ezra remains one of our favourites for the mid cap Oil & Gas sector for its earnings resilience despite industry difficulties. Our fair value is tweaked slightly to S$1.00 (prev. S$1.01) as we refine our model.