Monday, June 18, 2007

Ezra Holdings Limited - An Update and Commentary

Ezra Holdings (Ezra) recently announced that it had been awarded a contract by oil giant ConocoPhillips for its heavy-lift accommodation pipelaying vessel Lewek Champion. This event in itself is significant in that it symbolically represents a shift towards deep-water exploration, with this vessel (slated to be delivered before the end of FY 2007) being the first designed for deep-water. Although the press release did not mention the contract value, it stated that the charter contract would "contribute positively" to earnings in Fy 2008.

A little note here for the reader - I have emailed to the Management of Ezra and accordingly received a reply regarding how the chartering system works. Apparently, Ezra projects vessel usage up to 3 years in advance and now the expected shift seems to be towards deep-water capable vessels; hence the recent order of a 2nd pipe-laying vessel and 2 ultra-large 30,000 bhp Rolls Royce AHTS. Ezra will identify the charter party before any any vessel orders are placed, and the charter contract can only be signed close to the vessel completion date as there may be damages incurred if the contract is signed too early, but the vessel is delayed in the shipyard. It is therefore safe to conclude that by ordering these new vessels for FY 2009, Ezra's Management has already identified potential charter parties who have expressed interest in chartering the new vessels once they come on board.

Thus far, Ezra has only ordered 3 vessels for FY 2009 to fuel its expansion. This is a tiny number when compared to the 10+ vessels coming on board in FY 2007, and my expectation is that the company will identify more charter parties in order to place more orders to increase their fleet size. Another option is stated below which I will elaborate on later. Suffice to say that net gearing has remained at about 0.6x (based on Feb 28, 2007 balance sheet) and the company does not have the habit of doing share placements which will dilute existing shareholder's interests. Thus, it will probably embark on yet another round of sale and leaseback in order to remain asset-light.

Nylect Technologies

The 21.83% acquisition of Nylect Technologies also raises questions on whether this associated company can contribute positively to earnings, considering they only managed to turn around in Fy 2006 with a small profit of S$274,000. The speculation surrounding Nylect has been nothing short of spectacular, as the company is now trading at about S$1.21, effectively valuing the company at an astounding and mind-bloggling historical PER of 1,090 !! The share price rise has been nothing short of speculative as the company needs to increase earnings by 72.6 times just to get the PER down to 15. That means the company needs to have profits of S$19.8 million to justify the current share price. It is known that EOC is contracting with Nylect to provide services, but it remains to be seen if Nylect can achieve this kind of astounding growth of7,200%.

Reuters Interview - June 7, 2007

On a different note, Reuters had an interview with the MD of Ezra Mr. Lionel Lee and the essence of the interview can be found at this link. The interview is interesting in that it presents, for the first time, information on how Ezra plans to expand into the Western hemisphere. The MD talks about an acquisitive strategy which involves buying firms with a foothold in the Gulf of Mexico, Brazil, North Sea and West Africa. These firms should be entrenched players who already have their own fleet of vessels which can complement Ezra's capabilities. Also, he talks about using debt as a form of financing which means the net gearing for Ezra is likely to rise. If notes or bonds are issued, this would mean higher interest costs in the near-term which may also impact profitability. Thus, the important issue is how much Ezra pays for the acquisition(s), and whether they are earnings-accretive enough to justify the price offered. Other qualitative factors to look at would be the reputation of the company, its fleet, its network, customer base and if it has any competitive advantages. I trust that Ezra's Management would carefully consider these factors before making a purchase, and I remain optimistic that they would be able to grow the company in this way.

The rest of the interview is pretty self-explanatory, but it is worth noting that Mr. Lee said that there are 3 years of visible strong demand for deep-water vessels. Thus, the company would be projecting for such growth up to 3 years in advance. Ezra is gearing itself to become a global player and for this to happen, Ezra must expand its asset base significantly and also clinch more FPSO contracts, in order to put in at least slightly on par with global giants such as Prosafe and Haliburton. Although that may still be a long way to go, it is achievable if the company has a strategic vision moving forward into the next 5 years.

In the meantime, there is still the issue of the bonus; of which the company is preparing a circular to send to its shareholders. The EGM will be held in due course once the circular is despatched.

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