Ezion Holdings Ltd - Why buy back Teras Conquest 4 within two years of selling it?

30/8/2014 – Ezion Holdings Ltd says it will continue to invest in service rigs to meet the strong demand by oil companies in Asia Pacific, Middle East and West Africa.

In order to restructure its Port and Marine Base business in Australia, it is selling wholly-owned subsidiary Ezion Offshore Logistics Hub Pte Ltd (EOLH) and a 90% stake in subsidiary Teras Australia Pty Ltd (TAPL) to SGX-listed AusGroup Ltd for S$55 mln.

But before we delve any deeper in to the deal, here is a quick look at the company's recently announced earnings for Q2 2014:

Revenue: +37.8% to US$92.6 mln
Profit: +25.5% to US$45.5 mln
Forex gain/(loss): (US$1.2 mln) vs (US$0.1 mln)
Cash flow from operations: US$39.9 mln vs US$25.9 mln
Dividend: Nil
Order book: Not disclosed

Revenue was higher due to charter income from deployment of additional service rigs during the quarter, compared to a year ago.

However, it didn't disclose how many more service rigs were leased out in Q2.

Ezion says 'other operating expenses' surged more than four times due to increase in staff.

Again, it didn't disclose how much its staff increased by.

During Q2, it raised US$151.3 mln in net proceeds by issuing 100 mln new shares at S$1.94 per share to Hong Leong Company (Malaysia) Berhad.

Along with the Q2 earnings report, Ezion announced a bonus issue of one new share for every five already held.

DMG & Partners Research finds Q2 earnings to be in line with its expectations.

According to the broker, Ezion had 16 service rigs operational in Q2 and 11 service rigs are scheduled to join its fleet in the second half of the year.

Also, nine new rigs are scheduled to join its fleet in 2015/16.

Ezion is working on adding more units to its fleet, adds the broker.

DMG & Partners Research has a BUY rating on Ezion's stock with a target price of S$3 per share.

Analysts Low Pei Han and Wong Teck Ching at OCBC Investment Research find Ezion's H1 earnings to be about 46% of their full year estimate.

According to OCBC's latest research report, Ezion had 18 service rigs operational during Q2, two fewer than DMG.

Also, OCBC estimates 8 or 9 service rigs will be added to Ezion's fleet in the second half of the year, not 11 as DMG says.

OCBC maintains a BUY rating on the stock with a target price of S$2.78 per share.

However, the broker estimates the target price to be revised to S$2.31 per share after the proposed bonus issue.

Analyst Yeak Chee Keong at Maybank Kim Eng finds Q2 results to be in line with estimates.

Ezion is the broker's 'preferred pick' within the sector.

In contrast to DMG & Partners' and OCBC's research reports, Maybank Kim Eng says Ezion will deploy 6 liftboats in the second half of the year.

The broker has lowered its FY14 net profit estimate by 4% but raised its FY15-FY16 estimate by 4%-13% due to 'contract schedule and value adjustments'.

Maybank Kim Eng maintains a BUY rating on Ezion's stock with a target price of S$2.85 per share.

Analyst Ho Pei Hwa at DBS Group Research finds Ezion's H1 earnings to be about 40% of her full year estimate.

According to the broker, Ezion's 17 service rigs were operational during Q2, compared to just 12 in the same quarter last year.

The broker estimates its fleet size to grow to 26 vessels by the end of the current year, and 34 vessels by the end of next year.

It expects Ezion to record a gain of S$69 mln (about US$55 mln) on the sale of the Port and Marine Base business to AusGroup.

DBS Group Research maintains a BUY rating on the stock with a target price of S$2.90 per share.

The target price will be revised to S$2.42 per share after the proposed bonus issue, adds the broker.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. What is its official fleet size?

As Ezion has not mentioned the fleet size in its earnings report, shareholders only have the brokers' reports to rely on.

Unfortunately, the brokers are not unanimous about its fleet size.

DMG & Partners estimates 16 operational rigs in Q2 and an addition of 9 new rigs in the second half of the year.

OCBC says the company had 17 rigs that were operational in Q2 and it estimates addition of 8 or 9 new rigs in the remaining two quarters.

Maybank Kim Eng says the company will deploy 6 new liftboats in the second half of the year.

And DBS Group Research says it had 17 service rigs that were operational during Q2.

In the middle of such variety of estimates, we wonder what the actual fleet size of Ezion is.

Also, how many more service rigs will it add to its fleet?

Question

2. What kind of bonus shares are issued without capitalising the reserves?

Investors hoping for Ezion's shares to be more liquid must be delighted after the company announced a second bonus issue in less than a year.

On July 31, Ezion announced a bonus issue of one new share for every five already held.

Last year, on August 7, Ezion announced a bonus issue of one new share for every five already held.

The bonus shares were listed and quoted on SGX Mainboard on November 15.

Both the issues have one thing in common: the bonus shares were, and will, be issued fully paid at nil consideration, without capitalisation of the company's reserves.

In line with that, last year, Ezion's share capital didn't increase after the bonus issue as the company didn't receive any cash or profit in lieu of cash.

However, Ezion's outstanding share base increased by 20%.

Going by the precedent, we can safely assume that it is what would happen this year, too.

Now that's a bit odd because bonus issues are understood to be a distribution of company's profits in shares, instead of a cash dividend.

Therefore that makes us wonder how Ezion's bonus issues are any different from a sub-division of shares.

Aren't every 6 shares of the company after the bonus issue worth as much as every 5 shares were worth before the issue?

Isn't that what happens on a sub-division of shares?

Total number of questions in the full story: 16)

We have invited the company (ir@ezionholdings.com) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.

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