Wednesday, July 04, 2007

Ezra – Disposal of EOC Limited and Issue of Bonus Shares


Ezra announced on July 3 that it intends to dispose of its 43% stake in EOC Limited, which was recently listed on the OTC on the Oslo Bourse. They are also issuing about 293 million bonus shares in a 1:1 bonus issue which was announced on April 9, 2007. The bonus issue and disposal need to be approved at an EGM to be convened by Ezra at a later time, and there will also be a books closure date announced in due course for the determination of entitlements for the bonus share issue.

Bonus Issue

Ezra has declared a one-for-one bonus issue, presumably to increase their share capital base and improve trading liquidity in their shares. Recall that OCBC also had a share split of 1 for 1 some time back, bringing their share price down from a lofty S$13 to a more affordable S$6.50 then. As to whether such a move by Ezra would increase the trading liquidity, I would hazard a guess by saying that those who intend to buy 500 shares currently would be unable to do so as the counter is traded in board lots of 1,000 shares. By doing a bonus issue, the price is halved and potential retail investors will find the absolute price more affordable. There is only the issue of EPS dilution which was also stated in the announcement, as EPS will be halved when share capital doubles. However, the long-term view is such that EPS will eventually catch up because the company is growing its earnings and revenues strongly.

Disposal of 43% Shareholding in EOC

Ezra intends to sell off up to 43% of its stake in EOC to retain a 50% stake once it is listed on the Main Board of the Oslo Stock Exchange (OSX). This 43% is made up of about 47,710,436 shares and Ezra are appointing a placement agent to secure a vendor sale agreement for this transaction. Factors which are contingent upon the completion of the disposal are:-

1) Expiry of moratorium from Pareto Securities, who has assisted in the private placement of EOC shares on the OTC market of the OSX – I am unsure how long the moratorium lasts, but usually it is 6 months for most IPO, which means it could expire around August to September 2007, just before or after Ezra’s year-end.

2) Execution of the vendor sale agreement prior to the official listing of EOC (at a market price which approximates NOK 24 per share) – there is still uncertainty here over the final share price to be transacted at. NOK 24 is simply an indicative price based on the last closing price of EOC on the OTC market on OSX. A 10% discount will also be factored into the final sale price.

3) Successful listing of EOC on the OSX – assuming all regulatory requirements are met, I do not think this condition would pose a problem.

The disposal is estimated to net proceeds of S$261.8 million and will allow Ezra to recognize an exceptional gain of S$197.4 million on the disposal of an investment. After the disposal, Ezra will still retain 50% control over EOC Limited, but it is unsure whether they will use EOC to own any other vessels it may purchase. Currently, EOC has 100% ownership over 5 companies representing 4 vessels (except for EMAS). However, EMAS is the company which owns the FPSO to be delivered in late FY 2008. Thus, there are a few financial effects from this transaction which I will summarize:-

a) Cash inflows of S$261.8 million for Ezra which will be used to fund their business expansion and acquisitions. I expect them to use this cash to bid for their second FPSO project as well as to acquire companies in territories which they currently do not operate in. Thus, this two-prong approach will help them grow through order book acquisitions and corporate takeovers. The fact that they can realize part of their investment in EOC is beneficial to the company (remember that book value is only a mere S$51.5 million) and the extra cash means they can minimize doing placements which will be dilutive and avoid taking loans which would incur interest costs. Ezra has also hinted that it may pay a dividend from the proceeds of the sale of EOC shares, but I would rather the company use the cash to enhance shareholder value through higher ROE; rather than paying it out to shareholders.

b) An exceptional gain of S$197.4 million will be recognized in the books. I do not think this gain will be deferred. The only question is whether it will be recognized in FY 2007 or FY 2008. This exceptional gain should NOT be used to compute EPS as it is non-recurring in nature and will distort EPS if used.

c) NTA of Ezra will increase as a result of the large cash inflow, boosting consolidated NTA (as at August 31, 2006) from S$184 million to S$382 million. This translates to about 65.13 cents per share based on the new weighted average number of shares. Coincidentally, my cost will also be reduced to about S$0.65 per share (halved from S$1.30 pre-bonus), which means I have an adequate margin of safety as my cost is now equivalent to the adjusted NTA.

d) EPS will half after the bonus issue, but will increase to 45.43 cents per share after the disposal. However, as I mentioned earlier, it will not be prudent to take the disposal gain into account; and anyway the figures used are historical, thus it will not be possible to compute a forward EPS base on current information. The figures given in the announcement are largely for illustrative purposes only.

The pros and cons of this exercise are stated below:-


i) Ezra will be able to realize cash from its investment which can be used to fund its business expansion. This beats having to raise cash through issue of equity or to go for CB or bank loans.

ii) Shareholders will benefit as the company locks in the market value of EOC’s assets which are trading at a premium to the book value on OSX.

iii) There was a lingering worry of mine on how they intended to fund the new AHTS, FPSO and pipelay barge. With this announcement, it would seem that they will be flushed with cash for usage, and need not resort to a sale-and-leaseback (though this option may still be considered for the AHTS and pipelay).


i) By selling off part of EOC Limited, Ezra are missing out on the potential revenue and profit flows from EOC as it holds 4 of Ezra’s vessels and EMAS holds the FPSO. Thus, I am questioning if this move is good for shareholders in the long-term.

ii) There is also a risk of the price of EOC shares fluctuating from NOK 24, and the realized gain and proceeds from the exercise may not materialize or may be substantially lower.

This is my preliminary assessment of the situation. More will be discussed once the circular for the EGM arrives.

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