Thursday, August 09, 2007

Ezra – Milestone Contract for Pipelay Barge

On August 7, 2007, Ezra announced that they had secured a contract to provide services for a national oil company as part of a US$888 million sub-sea installation project. The vessel in question is Lewek Champion, which is under the care of Emas Construction and Production Pte Ltd (a 100%-owned subsidiary of EOC Ltd of which Ezra has an 88% stake). Lewek Champion is Ezra’s first heavy-lift, accommodation and pipelay barge and was only recently delivered (late FY 2007). Recall that Lewek Champion was also chartered out to ConocoPhillips for 1H FY 2008 in an announcement dated June 11, 2007. For ConocoPhillips, the vessel will be deployed in the Timor Gap where it will be used for accommodation support and de-commissioning work in the planned shutdown of the Bayu Undan platform.

From these two announcements, there appears to be some “overlap”. How can Lewek Champion be chartered to ConocoPhillips and the national oil major at the same time ? The press releases do not provide a timeline for the usage of the vessels and there was also no contract value specified (note that the US$888 million refers to the entire sub-sea project, not Ezra’s portion which only includes the provision of services). The best scenario I can come up with is that the Lewek Champion would be deployed to ConocoPhillips in 1H FY 2008, after which it will be used for the sub-sea project from the remainder of FY 2008 till FY 2010. This will ensure a constant revenue stream for the vessel and if charter rates increase, there may also be a clause in the contract for variable rate adjustments, which was why Mr. Lionel Lee mentioned that he wished to take advantage of the buoyant conditions in the oil and gas industry.

Even though the contract values were not specified (which makes it difficult to estimate the earnings stream from Ezra), the good news is that the vessel will be on charter for at least 3 financial years up till FY 2010. This will ensure a steady and constant stream of revenue even as Ezra decides to scale up its business by expanding their fleet further. Also recall that Mr. Lionel Lee had boldly gave a guidance of snaring one FPSO deal every 18 months. Thus far, the previous FPSO deal was sealed back in October 2006, so this means they are confident of securing another by March 2008 (about 7 months away from now). I am not sure if the company may be over-stretching themselves as they may not have the financial muscle (funds) of the larger players (such as Tidewater and Solstad) to bid aggressively for more FPSO projects. The cost of managing an FPSO is very high even though the charter rates are strong and one charter can last for seven financial years; thus the initial outlay for Ezra will also be a drain on cash flows.

Managing cash is an important aspect of any business, but for Ezra’s case it is particularly important as their vessels are very capital intensive and require a lot of upfront funding before they can be constructed and deployed on charter contracts. Ezra’s use of financing schemes such as sale-and-leaseback have managed to enable them to keep their balance sheet light and ensured that they have cash inflows to fund further expansion. This strategy is sound in the short-term but becomes riskier in the medium-term as Ezra would need to depend on a steady stream of chartering cash inflows in order to sustain their operational leases for the sale-and-leaseback vessels. Fortunately, I was told that Ezra will only embark on a vessel order if it has a firm order from a customer for the use of that vessel. For FY 2009, they have already ordered two 30,000 bhp AHTS and another pipe-lay barge; and the understanding is that they are already able to find customers willing to charter these vessels. The future is unclear at this point as Ezra has not made any indication of ordering more vessels, but more will probably be revealed when they announce their FY 2007 results in late October 2007. Kim Eng’s latest report on Ezra dated August 8, 2007 has forecast a full-year net profit of S$75.1 million while DBSV is more conservative with an estimate of S$71.1 million net profit after tax.

Update: Ezra has obtained in principle approval for the listing and quotation of the bonus shares from SGX. This means that they can go ahead and convene an EGM to seek approval for the bonus issue and the proposed sale of EOC shares.

Global Voice – Comments and Update before their 1H 2007 results release

Thus far, Global Voice (GV) has been announcing contracts on a regular basis every week or so. There have been 19 contracts announced with various companies (some purportedly large and some smaller ones) for FY 2007 (up till today), which boils down to about an average of 2.5 contracts per month. There is, of course, no mention of contract value or duration as this is not allowed in the IT industry and would be tantamount to a breach of client confidentiality. As a result, it is very difficult to estimate revenues and to project revenue growth because each announced contract may only be of a low value or of a short duration.By referring back to the FY 2006 results announcement, notice that under Note 15 on Page 19, the breakdown of sales is provided as about EUR 11 million (after removing the item sales of fixed assets which is a one-off non-recurring item). Essentially, there was almost no growth at all from FY 2005 to FY 2006 as FY 2005 already registered recurring sales of about EUR 11 million (remove the EUR 5.6 million of sales of fixed assets). Some may argue that GV has scaled up their operations a lot more in FY 2007, re-branded themselves as EUNetworks and also hired more sales and marketing staff to aggressively bid for projects.

All this is well and good, of course. However, it still does not guarantee that GV can turn-around. Here are several danger areas which may play itself out in the coming weeks:-

a) Revenues may not have increased sufficiently to offset increased expenses relating to GV’s aggressive push for market share. Recall that GV said that only 2% of their fibre network was being utilized as at FY 2006, which implies that 98% was still available for “leasing” to customers. However, the costs involved in marketing and selling their fibre may outweigh any potential benefit from it. I expect GV to have increased marketing costs (for its EUNetwork launch as well as sponsor of several network events including Capacity 2007), increased staff costs (to boost their sales team) and increased administrative costs (as a result of the expansion of their sales team, a requisite backup team is necessary to provide support). Finance costs will also remain high because of the interest due on their convertible bonds in April 2007.

b) Cash flows may also be an issue for GV because of their requirement to pay interest cost upfront, while slowly collecting fibre leasing revenue from their customers. In FY 2006 financials, there was an operating cash outflow of EUR 5.5 million and also a net investing cash outflow of EUR 25.8 million for purchase of fixed assets. Most of their cash inflows came from borrowings (about EUR 34.2 million) and thus they are highly geared. The FY 2006 ending cash balance of EUR 8.3 million is not impressive and for the 1H 2007 results, the cash flow statement should be carefully scrutinized to see where the cash has been spent.

c) Demand might be an issue for GV as they are, after all, in the technology industry where services and products can go obsolete faster than one would expect. GV always touts that their private fibre networks are unique in that they have millions of miles of fibre for use all over Europe which can link datacenters together and reduce data redundancy. It remains to be seen how many corporations actually require GV’s services as they provide pan-Europe connections which some companies may either not require or cannot afford.

d) Management has been known to talk about the share price by saying that it is under-valued and that they would support it if necessary. I usually frown upon Management which likes to talk about the share price as this means they are more concerned about the market price than on running the business. I do not know if their remuneration or bonuses are in any way tied to the share price and am not insinuating anything; but take note that an excessive focus on share price is not healthy (the Management of the other companies I own do NOT talk about share price, they just focus on the business)

Even though the frequent announcements of contract wins has ignited hope for GV to turn-around this year, much still remains uncertain. Even if they were to show a marginal profit for 1H 2007, I may still consider divesting as I am not comfortable with the lack of clarity for their earnings, the uncertain demand for their services and their high gearing.

Wishing all Singaporeans a Happy National Day !


Anonymous said...

awesome value investing blog! i particularly like how you summarise the AGM meetings you attended and how you analyse the latest developments of the companies you invested. Keep it up! BTW, why do you call yourself musicwhiz? are you active in the local music scene as well?

musicwhiz said...

Hi Anonymous,

Thank you for the compliment ! I used to be very much into keeping track of music charts, lyrics and artistes in my teenage years; hence the nick musicwhiz. My focus is now on value investing but I still enjoy listening and singing along to a great song. I love the 80's and 90's ballads and power (rock) ballads.


Anonymous said...

Global Voice is in a specialised area of telecoms biz called bandwidth/managed services.

A little background how this works:
- technology for transmission of data today rest on optical and electrical transmission.
- Optical is used for long distances because of lower attenuation (loss of signal) thru fibre optics. GV is in this biz.
- an optical fibre today, using DWDM technology, can support an unimaginable amount of data transmission. Hence for most network operators today, it is not surprising if they say their network is only 2~3% utilised.
- But the more worrying thing is their capex and opex. It takes a few US$b to lay an optical network with repeaters and amplifiers, and it takes ten/hundreds of US$m to keep these equipment running. Recall how Global crossing had to shut down 70% of their biz (and network) to stem bleeding. In the end, nowadays, you don't hear ST group talking much abt it.
- without peering at the exact numbers for GV, I would expect it to be in a very difficult biz.
- smalltimer

musicwhiz said...

Hi smalltimer,

Thanks for your enlightening summary of the business of GV. Incidentally, I have already written a summary of GV's results and numbers from an accounting perspective and will be ready to post in soon. I share the same opinions as yourself about the opex and capex and feel that this will "drag" GV down for many more periods to come. The quick turnaround that all shareholders are hoping for is not going to come as soon as hoped, and I will stop deluding myself and move on to a better investment. Watch out for this review in my next posting !

Regards, Musicwhiz