YHM soars as Ezion moves in, but investors should be wary

CHEW Thiam Keng, CEO of offshore services provider Ezion Holdings, is taking control of YHM Group and preparing to transform it into something more interesting. But investors thinking about jumping in now would need a strong appetite for risk.

On Oct 25, Ezion said it would subscribe for 3.2 billion new shares issued by YHM Group at 0.18 Singapore cents per share. The total consideration of S$5.76 million will be satisfied by the issue of 4.65 million new shares in Ezion at S$1.2454 per share. YHM will issue a further 555.55 million new shares to Sunshine Capital Group at the same price, that is, a total consideration of just over S$1 million in cash. In addition, YHM will issue 166.67 million new shares to Stone Forest Corporate Advisory in lieu of a S$300,000 fee for introducing Ezion to YHM.

Ezion will end up with a 44.1% stake in the enlarged YHM. Ezion will also acquire the option to subscribe to a further 3.96 billion new shares in YHM at 0.18 cent each. In addition, YHM will be issuing options for a further 590 million new shares on the same terms to Sunshine Capital and Woo Peng Kong, a businessman with over 30 years of experience in the offshore sector, who was introduced to YHM by Ezion.

Ezion plans to steer YHM into offshore oil-and-gas-related businesses. These will be "complementary to but not in competition with the existing business of Ezion", according to YHM's filings on SGXNet. Formerly a renewable energy company known as China Enersave, YHM had negative equity of S$113,000 as at June 30, a result of accumulated losses. Last year, YHM raised S$950,000 through a rights issue. It attempted to acquire a property development business in China without success. Its only existing business at the moment is providing scaffolding for the marine sector.

Chew tells The Edge Singapore that Ezion's purchase of a major stake in YHM is similar to his own purchase of Nylect Technology six years ago. In 2006, Chew acquired a controlling stake in the loss-making producer of electrical wires for just S$8 million. The company, which is now Ezion, sold its electrical wiring business and issued new shares to raise cash to acquire offshore service vessels and bid for contracts around the world.

The company's big break came in 2009, when it clinched a AS$300 million logistics support deal for the Gorgon Field in Australia with partners Pacific Basin Shipping and the Skilled Group. More contracts have since poured in, including for work in places as far afield as Alaska, the North Sea, the Gulf of Mexico and even the Caspian Sea. Today, Ezion has a growing fleet of liftboats, barges, anchor handling tugs and refurbished rigs. The company's market value is almost S$1.1 billion.

According to Chew, the group is now ready to broaden the scope of its business, leveraging the client base it has already built. "Currently, we have two businesses: chartering our liftboats and other vessels, and the LNG logistics projects in Australia. Both are taking up time and capital," he says. "We've been invited to bid for projects, which we [neither] have the balance sheet to do, nor the capital to undertake," he continues. "The only way is to get an associate company with a separate management team to bid for those projects. This is what we're trying to do."

Chew doesn't say precisely what sort of work YHM will take on, except that it will be offshore oil and gas, or who he will get to run it. Nevertheless, the market seems confident that he will be as successful with YHM as he has been with Ezion. Since the announcement of the transaction, YHM's share price has more than doubled, from 0.7 cent to two cents, before easing.

Extreme volatility

Should investors jump into YHM now? Is YHM the best way to ride with Chew as he continues to build up his offshore services business?

To be sure, Chew has been remarkably successful with Ezion. Following various placements over the last few years that raised some S$168 million in equity to fund its growth, his original stake in the company has now been whittled down to 20%. The market value of that reduced stake is S$200 million, about 25 times the cost of his original investment.

Yet, few investors would have managed to get into Ezion on the same terms as Chew, because the stock took off almost immediately after he got in. Similarly, investors won't be able to get into YHM as cheaply as Ezion has. In fact, the new shares YHM is issuing to Ezion are priced at an 80.4% discount to the volume weighted average price of 0.92 cent for trades done on Oct 23, before the transaction was announced. At current levels, shares in YHM are already trading at 10 times Ezion's entry cost.

That's not to say that YHM won't climb higher in the immediate term. However, investors taking that bet ought to be prepared for extreme volatility in the months ahead.

Ezion growing fast

On the other hand, Ezion's growth isn't letting up. In August, it clinched its third contract to provide full logistics and support services activities for the haulage of equipment and modules for the development of LNG facilities on Curtis Island in Queensland, Australia. The contract value of about US$71 million is in relation to the development of the first two LNG trains. "There could potentially be up to four LNG trains to be developed for the abovementioned project, which will require similar types of logistics vessels," Ezion says in a statement.

Separately, in August, Ezion secured a charter contract with a value of up to US$80 million over a five-year period to provide a service rig for use in the North Sea. The rig is to be deployed at the end of this year. At the same time, the company has secured a letter of intent of up to about US$87.6 million over a four-year period to provide another service rig for use in the same vicinity. This service rig is to be deployed by mid-2014.

In September, Ezion announced a charter contract with a value of about US$201 million over a five-year period to provide a service rig to be used by a Southeast Asian national oil company to support its activities in the Caspian Sea. The company also received a letter of intent with a value of up to about US$82.1 million over a five-year period to provide another service rig to support the activities of the same national oil company, to be deployed in 2014. The oil company is said to be Indonesia's Pertamina.

While Chew is yet to assemble a business within YHM, it seems the operations at Ezion have developed a strong momentum. Shares in Ezion are up 90% this year, and are trading at 7.3 times consensus forecast earnings for 2013. The company is due to report its 3Q2012 results on Nov 6.

This story first appeared in The Edge Singapore weekly edition of Nov 5-11, 2012.

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