Company Update, 15 July 2013

Ezra Holdings (EZRA SP)

Industrial - Transportation Market Cap: USD739m

Sell (from Neutral)

Target Price: Price:
Macro

SGD0.70 SGD0.96

Subsea Loss-Making In 3QFY13

Risks Growth Value

Ezra Holdings (EZRA SP)

Price Close Relative to Straits Times Index (RHS)

1.40

134

1.30

124

1.20

114

0 0 . 2 0 0 Ezra reported a core net loss of USD52m, although a USD59m one-off . 0 gain from Ezion shares sale boosted its headline net profit to USD7.2m. 0 Following the poor results, we slash our FY14-15F core EPS estimates 0 by 12%-24% on lower margins. The groups continued inability to deliver earnings, weak cash generation and industry-wide project delays could add further strain on its balance sheet. Downgrade to SELL, with our TP lowered to SGD0.70 (from SGD1.15 previously).

3 . 3 0 . 2

1.10

104

1.00

94

0.90

84

0.80 35

74

30
Vol m

25
20

USD52m core net loss below expectations. Excluding a USD59m gain from one-off items, 3QFY13 core net loss of USD52m was below our and consensus expectations. 3QFY13 revenue rose 19% y-o-y and 28% q-o-q to USD317m on higher subsea and marine revenue, but blended gross profit margin was disappointing at 0.7% (3QFY12: 16.7%). Significant one-off items were: i) a USD67.4m gain from Ezion shares sale, ii) a USD4.5m gain from derivative financial instruments, iii) a USD7.2m loss from fixed assets sale, and iv) a USD5.2m net forex loss. Subsea loss-making; management change in offshore. 3QFY13 operating EBITDA came in at -USD24.3m, while 9MFY13 operating EBITDA was USD29.2m vs our pre-revision estimate of USD143m . The subsea division posted negative mid-teen margin in 3QFY13, while the offshore unit recorded a 17%-18% gross margin. Ezra reshuffled the top management team in its offshore division. More contracts. Ezra secured USD505m new contracts for the subsea and offshore subsea services (OSS) units. YTD FY13, EMAS AMC has secured USD1.4bn orders and >USD2.5bn since the AMC acquisition in March 2011. Currently, Ezra has a USD2bn orderbook backlog. FY13F to remain in core net loss; FY14-15F EPS cut by 12%-24%. We cut FY13F earnings from a core net profit (after preferred dividend) of USD19m to a core net loss of USD61m. We also lower FY14-15F core net profit from USD49m/USD73m to USD37.6m/USD64.6m. Downgrade to SELL, with a lower SGD0.70 TP, pegged to 0.5x FY14F P/BV. Our target P/BV is justified by its poor ROE of <5% and gearing. At our TP, the stock is valued at 14.6x FY14F EPS.
Aug-11 559 40.1 26.0 (54.0) 0.03 0.00 0.0 22 5.6 0.77 na 12.7 96.3 Aug-12 984 65.0 4.4 (83.0) 0.00 0.01 1.6 158 7.0 0.73 na 16.7 110.3 Aug-13F 1,197 34.4 (61.5) (1493.0) (0.06) 0.01 1.6 na 3.3 0.70 22.8 32.3 92.6 780.6 Aug-14F 1,498 37.4 37.4 na 0.04 0.01 1.6 20 3.5 0.67 80.8 12.4 95.7 (49.0) Aug-15F 1,699 64.1 64.1 71.2 0.07 0.01 1.6 12 5.6 0.63 11.7 10.1 92.5 (44.9)

15
10

Jul-12
May-13

5
Sep-12
Nov-12

Jan-13

Source: Bloomberg

Mar-13

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) Lionel Lee Aker Solutions Mondrian Investment Shariah compliant

4.75m/3.80m 11.5 -26.7 0.91 - 1.35 60

22.7 7.4 7.3

Forecasts and Valuations Total turnover (USDm) Reported net profit (USDm) Recurring net profit (USDm) Recurring net profit growth (%) Core EPS (USD) DPS (USD)

Jason Saw +65 6232 3871

[email protected]

Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) Our vs consensus EPS (%)

Lee Yue Jer +65 6232 3898

[email protected]

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

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Ezra Holdings (EZRA SP)

15 July 2013

Financial Summary
Figure 1: Quarterly financial summary
FYE 31 Aug (USDm) Revenue 3QFY12 2QFY13 3QFY13 QoQ % 265.6 247.1 317.1 28 YoY % 9MFY12 9MFY13 19 657.9 842.9 YoY % 28 Remarks Higher from subsea (+USD39.3m), marine (+USD12.9m) but offset by lower offshore (-USD0.7m) -17 Negative mid-teen margin from subsea. Offshore recorded 17-18% GP margin 54 Boosted by sale of Ezion shares. See exceptional breakdown below. 25 Higher due to higher personnel expenses and subsea infra build-up to prepare for new projects. -6 -50 24 28 -43 -151 58 22 442 43 49

Gross profit

44.4

42.3

2.2

113.4

94.4

Other income

26.4

34.4

63.5

67.9

104.2

Admin expenses

-34.0

-35.1

-44.1

-92.4

-115.1

Operating profit Operating EBITDA Depreciation and amortisation Depreciation of PPE Amortisation of intangible Operating EBIT Financial income Financial expenses Share of results of associates Share of results of joint venture Exceptional gains Gain on disposal of AFS investments Gain on disposal of PPE Gain on dilution of interest in associate Gain on disposal of subsidiary Realised gain on derivative financial instruments, net Gain/loss on disposal of assets held for sale Fair value changes of derivative instruments Fair value changes of FVTPL Net forex gain Profit before tax Income tax Minority interest Net profit
Source: Company data, OSK-DMG estimates

36.8 24.5 -13.0 -11.0 -2.0 11.5 1.0 -9.9 -0.3 0.6 25.2 0.0 0.0 4.9 0.0 0.4 0.0 12.8 -0.6 7.7 28.2 -5.8 0.0 22.4

41.6 22.6 -14.1 -13.3 -0.8 8.5 1.2 -10.5 7.3 0.8 33.1 0.0 30.0 2.0 0.2 -0.1 0.0 0.0 0.0 1.1 40.4 -7.4 -3.3 29.7

21.6 -24.3 -13.0 -13.4 0.4 -37.3 1.2 -12.2 4.2 1.5 58.9 67.4 0.0 -0.1 0.0 4.5 -7.2 0.0 0.1 -5.9 16.4 -6.7 -2.5 7.2 -76 -68 -59 -42 -538 -424 -207 -199

88.9 58.0 -33.6 -31.5 -2.2 24.4 2.4 -27.3 2.5 2.1 64.5 34.8 1.1 4.9 0.0 0.5 0.0 7.6 -0.2 15.7 68.5 -10.9 0.1 57.7

83.6 29.2 -41.5 -40.3 -1.2 -12.4 3.8 -33.2 13.4 3.0 95.9 67.4 30.0 2.0 0.2 4.3 -3.4 0.6 0.1 -5.1 70.6 -20.0 43.6

3 84 -24 Mainly withholding taxes

-6.9 -10,152

Other takeaways from the results:

Weak margins from poor subsea execution and idle vessels. Ezras gross profit margin came in at 0.7%. 9MFY13 gross margin was 11.2%. Subsea was loss-making with negative mid-teen gross margin. Its offshore unit achieved a 17%-18% gross margin as profitability was hampered by eight idle vessels. Six of those vessels are now deployed while two vessels remain idle. Securing USD505m new contracts. These projects include: i) a letter of intent for a USD120m project in offshore West Africa using Lewek Constellation and Lewek Express, ii) a USD105m contract to support a deepwater project in West Africa, iii) USD53m contracts in the Gulf of Mexico, iv) USD102m chartering contracts for one platform supply vessel (PSV) and four anchor handling towing and supply (AHTS) vessels, and v) a USD126m project from an oil major in the North Sea. Ezras total backlog orderbook currently stands at USD2bn. The groups capex has trended down, with USD150m outstanding for Lewek Constellation, which is expected to be fully operational in 1Q2015. In between the transit from Xiamen to the Netherlands, Lewek Constellation will undertake a short-term job in Africa to test the capability of the vessel. Tender book now in excess of USD10bn. Ezras project sizes are getting bigger from USD50m-USD100m to USD200m per project. In the subsea construction, umbilicals, risers and flowlines (SURF) business, project value can go up to USD500m-USD1bn.
2

See important disclosures at the end of this report

Ezra Holdings (EZRA SP)

15 July 2013

Figure 2: Quarterly revenue

USDm 350.0 300.0 265.6 250.0 211.8 200.0 150.0 180.5 326.3 278.7 247.1 317.1

Figure 3: Quarterly gross profit

USDm 80.0 70.0 60.0 50.0 40.0 30.0 34.7 34.3

Title: Source:

72.9

Please fill in the values above to have them entered in y

49.9 44.4 42.3

100.0 50.0 0.0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13
Source: Company data

20.0 10.0 2.2 0.0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13
Source: Company data

Figure 4: Quarterly operating EBITDA

USDm 60.0 50.0 40.0 30.9 30.0 20.0 10.0 19.5 14.0 24.5 47.5

Figure 5: Quarterly gross profit margins

Gross margins (%) 25.0%

Title: Source:
19.2% 16.2%

22.3%

20.0%

Please fill in the values above to have them entered in y 17.9%

16.7% 17.1%

22.6

15.0%

10.0% 0.0

-10.0
-20.0 -30.0 -24.3 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

5.0% 0.7% 0.0% 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13
Source: Company data

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

Ezra Holdings (EZRA SP)

15 July 2013

Earnings: Expect Core Net Loss In FY13; Slashing FY14-15F EPS By 12%-24%
Figure 6: Changes in estimates
Profit and loss (US$m) Revenue Offshore support vessels Marine services Subsea COGS Gross profit Offshore support vessels Marine services Subsea Others Other income, net Admin expenses Operating profit (reported) Operating EBITDA Depreciation and amortisation Depreciation Amortisation Operating EBIT Investment income Interest income Interest expense Share of profit from associates Share of profit from JVs Exceptional Profit before tax Income tax Minority interest Net profit Preferred dividends Net profit to ord equity Net profit (pre-exceptional and pre-preferred div) Core net profit after preferred dividend
Source: OSK-DMG estimates

Old FYE08/13F 1,207.0 316.8 173.1 717.1 -960.0 247.1 78.5 29.4 129.1 10.0 77.0 -169.0 155.0 143.5 -55.4 -51.0 -4.4 88.1 1.3 3.5 -47.3 5.0 4.0 65.7 120.1 -16.9 -7.9 95.3 -10.5 84.8 29.6 19.1

Old FYE08/14F 1,412.4 334.3 181.8 896.4 -1,113.4 299.0 87.8 30.9 170.3 10.0 41.3 -183.6 156.7 181.0 -55.6 -51.2 -4.4 125.4 1.3 3.5 -47.3 5.0 4.0 30.0 121.8 -24.4 -7.9 89.5 -10.5 79.0 59.5 49.0

Old FYE08/15F 1,522.8 341.0 181.8 1,000.0 -1,187.4 335.4 94.5 30.9 200.0 10.0 41.3 -190.3 186.3 212.2 -57.1 -52.7 -4.4 155.1 1.3 3.2 -46.4 5.0 4.0 30.0 152.2 -30.4 -7.9 113.8 -10.5 103.3 83.8 73.3

New FYE08/13F 1,197.2 287.3 165.3 744.7 -1,044.2 153.0 53.7 29.7 59.6 10.0 107.2 -167.6 92.6 50.9 -55.4 -51.0 -4.4 -4.6 1.3 3.6 -43.6 18.0 4.0 95.9 74.6 -21.7 -7.9 44.9 -10.5 34.4 -51.0 -61.5

New FYE08/14F 1,498.0 332.7 160.0 1,005.3 -1,231.0 267.0 79.0 27.2 150.8 10.0 11.3 -179.8 98.5 152.8 -55.6 -51.2 -4.4 97.2 1.3 3.7 -48.9 20.0 4.0 0.0 77.3 -21.5 -7.9 47.9 -10.5 37.4 47.9 37.4

New FYE08/15F 1,699.4 339.4 160.0 1,200.0 -1,389.6 309.8 80.6 27.2 192.0 10.0 11.3 -186.9 134.1 190.0 -57.1 -52.7 -4.4 132.9 1.3 3.5 -50.9 20.0 4.0 0.0 110.6 -28.1 -7.9 74.6 -10.5 64.1 74.6 64.1

See important disclosures at the end of this report

Ezra Holdings (EZRA SP)

15 July 2013

Valuation: Downgrade To SELL with SGD0.70 TP

Our TP is pegged to 0.5x FY14 P/BV. We believe the stock could trade below its lowest P/BV of 0.57x on poor earnings and rising balance sheet risk. At our lower SGD0.70 TP, the stock is trading at 14.6x FY14F core net profit after preferred dividend. Figure 7: Price-to-book band
P/B (x) 1.50

1.30
1.10 0.90 0.70 0.50 0.30

Jul-11

Jul-12

May-11

May-12

Source: Bloomberg, OSK-DMG estimates

See important disclosures at the end of this report

May-13

Jan-11

Sep-10

Nov-10

Sep-11

Nov-11

Sep-12

Nov-12

Mar-11

Mar-12

Jan-13

Jan-12

Mar-13

Jul-13

Ezra Holdings (EZRA SP)

15 July 2013

Financial Exhibits
Profit & Loss (USDm) Total turnover Cost of sales Gross profit Gen & admin expenses Other operating costs Operating profit Operating EBITDA Depreciation of fixed assets Amortisation of intangible assets Operating EBIT Net income from investments Interest income Interest expense Exchange gains Other non-recurring income Pre-tax profit Taxation Minority interests Profit after tax & minorities Preferred dividends Reported net profit Recurring net profit
Source: Company data, OSK-DMG estimates

Aug-11 559 (445) 114 (71) 13 56 85 (26) (3) 56 13 2 (27) (10) 14 49 (9) 0 40 40 26

Aug-12 984 (798) 186 (135) (5) 46 96 (45) (4) 46 5 4 (38) 10 61 87 (22) 0 65 65 4

Aug-13F 1,197 (1,044) 153 (168) 15 1 56 (51) (4) 1 23 4 (44) (5) 96 75 (22) (8) 45 (11) 34 (62)

Aug-14F 1,498 (1,231) 267 (180) 10 97 153 (51) (4) 97 25 4 (49) 77 (21) (8) 48 (11) 37 37

Aug-15F 1,699 (1,390) 310 (187) 10 133 190 (53) (4) 133 25 3 (51) 111 (28) (8) 75 (11) 64 64

Cash flow (USDm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow Operating cash flow Interest received Interest paid Dividends received Tax paid Cash flow from operations Capex Other new investments Other investing cash flow Cash flow from investing activities Dividends paid Proceeds from issue of shares Increase in debt Other financing cash flow Cash flow from financing activities Cash at beginning of period Total cash generated Forex effects Implied cash at end of period
Source: Company data, OSK-DMG estimates

Aug-11 56 29 (19) (80) (14) 2 (27) 0 (12) (51) (414) 79 (335) (9) 452 (138) 305 187 (81) 3 109

Aug-12 46 50 (324) 206 (22) 4 (38) 1 (12) (67) (289) 42 (20) (267) 95 246 4 344 116 10 (0) 126

Aug-13F 1 55 (28) 67 94 4 (44) (22) 32 (250) 71 46 (133) 120 120 133 19 153

Aug-14F 97 56 (90) 13 76 4 (49) (21) 9 (100) (100) 80 80 153 (11) 142

Aug-15F 133 57 (64) 13 139 3 (51) (28) 63 (100) (100) 30 30 142 (7) 135

See important disclosures at the end of this report

Ezra Holdings (EZRA SP)

15 July 2013

Financial Exhibits
Balance Sheet (USDm) Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets Total investments Tangible fixed assets Intangible assets Total other assets Total non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities Share capital Retained earnings reserve Shareholders' equity Minority interests Other equity Total equity Total liabilities & equity
Source: Company data, OSK-DMG estimates

Aug-11 116 60 302 177 655 311 960 172 52 1,495 2,149 294 71 260 625 516 162 678 1,303 395 450 845 1 (0) 846 2,149

Aug-12 133 89 439 391 1,053 219 1,079 226 153 1,677 2,730 607 120 299 1,026 510 186 696 1,722 490 518 1,008 (0) 0 1,008 2,730

Aug-13F 153 115 574 332 1,173 162 1,222 221 209 1,814 2,987 436 148 356 939 681 186 867 1,806 490 563 1,053 8 120 1,181 2,987

Aug-14F 142 144 718 344 1,348 186 1,215 217 264 1,883 3,230 464 185 426 1,075 733 186 919 1,993 490 611 1,101 16 120 1,237 3,230

Aug-15F 135 163 815 352 1,465 210 1,206 213 321 1,950 3,414 474 210 473 1,157 752 186 938 2,095 490 686 1,176 24 120 1,319 3,414

Key Ratios (USD) Revenue growth (%) Operating profit growth (%) Net profit growth (%) EPS growth (%) Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) DPS Recurrent cash flow per share
Source: Company data, OSK-DMG estimates

Aug-11 58.1 1.3 (47.8) (54.7) 9.0 10.1 7.2 2.2 5.6 96.3 0.00 (0.07)

Aug-12 76.0 (18.5) 62.3 34.7 5.9 4.7 6.6 2.7 7.0 110.3 0.01 (0.07)

Aug-13F 21.6 (98.7) (47.0) (50.0) 4.5 0.0 2.9 1.2 3.3 92.6 0.01 0.03

Aug-14F 25.1 16830.7 8.6 8.6 4.6 6.5 2.5 1.2 3.5 95.7 0.01 0.01

Aug-15F 13.4 36.6 71.2 71.2 6.8 7.8 3.8 1.9 5.6 92.5 0.01 0.06

See important disclosures at the end of this report

Ezra Holdings (EZRA SP)

15 July 2013

SWOT Analysis
One of the largest Asian-based offshore service providers with key expertise in the deep water market. Operates a strong fleet of project-enabling assets such as the Lewek Connector and BOA Sub C. Global operations in five continents. Established competitors are bidding aggressively for new projects. Delays in project could hamper fleet utilisation.

Well-positioned to capture the rising spending in the subsea market.

Weak balance sheet may deter EMAS AMC from taking on large subsea EPCC contracts. Cabotage ruling in certain countries may affect OSV charter contracts Tight technical workforce could drive up wages.

P/E (x) vs EPS growth

25 20 15 10 5 0 80% 48% 16% -16% -48% -80% 0.90 0.80

P/BV (x) vs ROAE

12% 11%

0.70
0.60 0.50 0.40 0.30 0.20 0.10

9%
8% 7% 5% 4% 3% 1%

Jan-11

Jan-12

Jan-13

Jan-15

Jan-12

Jan-13

Jan-14

Jan-14

Jan-11

P/E (x) (lhs)

EPS growth (rhs)

P/B (x) (lhs)

Return on average equity (rhs)

Source: Company data, OSK-DMG estimates

Source: Company data, OSK-DMG estimates

Company Profile
Ezra is a leading offshore contractor and provider of integrated offshore solutions for the oil & gas industry with a global presence, having 16 offices in five continents. The subsea business, its largest business unit, contributed 57% of group revenue in FY13, followed by 28% from the offshore support services division.

See important disclosures at the end of this report

Jan-15

0.00

0%

Ezra Holdings (EZRA SP)

15 July 2013

Recommendation Chart
Price Close
2.6 2.1 1.6 1.1 0.6
Buy 0.1 Jul-08 Neutral Sell Trading Buy Take Prof it Not Rated
Recommendations & Target Price

NR

2.54

1.80

1.18 1.10

2.91

2.80

2.20 2.40

1.06

0.92

2.96

1.44

Oct-09

Jan-11

May-12

Source: OSK-DMG estimates, Bloomberg

Date 2013-05-31 2013-05-20 2013-01-15 2012-11-08 2012-10-29 2012-10-16 2012-04-13 2012-03-12 2012-02-29 2012-01-12 Recommendation Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Target Price Price 1.15 1.15 1.15 1.15 1.15 1.14 1.10 1.18 1.18 0.92 0.98 1.02 1.21 1.10 1.14 1.20 1.14 1.12 1.25 0.95

Source : OSK-DMG estimates, Bloomberg

See important disclosures at the end of this report

1.15

1.14

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Jakarta

Shanghai

Phnom Penh

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