Sunday, October 28, 2007

Ezra - A Brief Update and Commentary

I had followed up with Management on several queries I had on the company and they were happy to respond to clarify. Below are some of the points which I clarified, and I also give a personal view of how I think the company might perform in the coming years:-

1) Presentation Slides for FY 2007 results - According to Management, there will be NO slides for FY 2007 results, unlike during the 1H FY 2007 results release. Thus, it is now difficult to get a quick summary of Ezra's existing fleet and also their vessel delivery schedule for FY 2008. The only way is to wait for their Annual Report, which most likely will contain some important information on their fleet size, strategies and future direction. In the meantime, Management has assured that they remain committed to their asset-light plans which were formulated in FY 2005. They have advised me to look through the reports written by the various brokerages in order to get a clearer picture of what is happening, as the analysts remain in regular contact with the Group. Thus far, I have the latest reports from DBSV, OCBC Research, JP Morgan, Kim Eng Research and CLSA.

2) Cost of MFSV versus 30,000 bhp AHTS - I did bring up the subject of why the cost of the MFSV ordered recently was nearly 4 times as high as the previous newbuilds. Management has advised that the cost of the AHTS (being S$49 million each) did not include equipment and machinery that was supposed to be installed into the vessel. Thus, I assume that the total capitalized cost would increase significantly after this was done. Moreover, the MFSV has many additional capabilites (described in the press release) as compared to an AHTS, and is able to work in waters greater than 3,000m deep. This justifies the much higher cost. The purchase will be funded from the proceeds from the divestment of EOC Limited as well as debt financing.

3) Option for additional 7 MFSV - In the article in The Edge Singapore magazine, it was mentioned that Ezra would exercise the option to purchase an additional 7 MFSV by the end of the year, thus boosting their fleet size to 45 by the end of FY 2010. Mr. Lionel Lee also mentions that capex will hit US$1 billion by the end of FY 2010, as Ezra plans to scale up its fleet significantly. Through email, Management has clarified that there was no express intention to represent that they would incur the US$1 billion. Much depends on whether their current capex and future capex plans will proceed as planned, and it will be better to rely on the press releases which the Group regularly posts on SGXNet to get a better idea of the Group's capex requirements.

4) Clarification on 2nd Fabrication Yard in Vung Tau, Vietnam - According to Management, the current yard in HCMC (Ho Chi Minh City), Vietnam called Saigon Shipyard is expected to be fully operational by FY 2008. The majority of the yard is still under construction and the announcement of the US$130 million worth of contracts relate to delivery by FY 2010. Thus, the earning will not materialize so quickly. The second yard in Vung Tau is just a greenfield now (i.e. empty piece of land on which nothing sits on !), and the Group has plans underway to develop it into a second yard. There have been estimates (some too bullish) by brokerages on the potential revenue contribution from these 2 yards hitting about S$400 to S$500 milllion per year by FY 2010, but I prefer to stay conservative and monitor the progress of HCMC Logistics (which owns Saigon Shipyard) first. I am sure the Group will duly inform shareholders if there is any further progress in developing the Vung Tau site.

5) Quarterly Reporting - Management has cofirmed that they will be practising quarterly reporting from FY 2008 onwards, in order to comply with requirements set by Oslo Bourse for EOC Limited. Thus, any timeline for EOC Limited for the announcement of results should also apply to the Ezra Group. With this in mind, I anticipate that 1Q FY 2008 results should be released sometime in early January 2008 (for period ending November 30, 2007).

My opinion of the Group is that they are rapidly trying to scale up their deep-water vessel fleet in anticipation for FY 2010, when they expect global demand for deepwater vessels to exceed spply significantly. There is an inherent risk in all this, of course, if it fails to materialize. Current charter rates for AHTS are hitting record highs in the North Sea (according to JP Morgan and CLSA reports), and this trend is expected to continue into the near future with oil prices hitting record highs of US$92 per barrel.

The Group may engage in further sale-and-leaseback transactions (S&L) with Pareto or another financier in order to remain "asset-light" and to recycle the cash back into purchasing more vessels. If the option for the additional 7 MFSV were indeed exercised, then the Group would need a lot of cash and funding in the near term, and the options I can think of include S&L, EOC doing a placement of shares (diluting parent Ezra Group in the process), additional debt financing (through banks), additional debt financing through issuance of company bonds or additional equity funding through Ezra Group (direct dilution to existing shareholders). I will monitor Management's decisions with respect to fund-raising to see if they can manage this well without straining the Balance Sheet too much, and give updates on my blog accordingly.

As for the additional business of fabrication and construction, it remains to be seen if the Group can scale up their operations and clinch more contracts to addd to their maiden US$130 million one. Even then, Mr. Lee has mentioned that margins are much thinner (at 10%) as compared to their main business of chartering. Thus, even though revenues may be higher in the future, lower margins may means that profits do not increase proportionately.

One more possible avenue for growth is if EOC manages to clinch their second FPSO contract (as it was mentioned that they were bidding for FPSO contracts right now). Once again, funding becomes an issue even if they manage to do this.

Thus, although the future looks bright for the Group, there are still many uncertainties regarding its growth and I will be closely monitoring developments as time goes by.


fishman said...

Hi Musicwhiz,

How's things going?

Your thoroughness in analyse and diligence in making investigations really impress me much! Also insipres me a great deal, even making myself feel guilty for my slackness! Hai... =P

Would like to use this chance to ask your opinion about something. You mentioned in your post about how funding for the 7 MFSV can be made. Wonder which is the most prudent and why? Also which might posibly benefit shareholders the most? I remember you sharing about you selling GV because they were taking on too much debts through bonds(hope I remember correctly!), will the same criteria apply for Ezra or do you think the debt justified?

Many thanks again for sharing!


musicwhiz said...

Hello fishman,

Thanks for dropping by. I notice that when you leave a comment here it usually means your blog is also updated with a new post LOL ! ;)

I will be going on a business trip to Vietnam soon, so pretty busy. At the same time, doing some blogging and earning a bit of income with Nuffnang.

Haha glad I inspire you to do more research ! In fact, I think I am slacking off too as I have been busy at work + juggling family commitments + giving tuition for "O" level students. So it's pretty hectic, but also quite fulfilling.

It's a good question you have posed to me on Ezra, and I have been thinking of this as well. Incidentally, Ezra has (as at the time of my reply) ordered another MFSV from Karmsund at the same cost of S$162.4 million, though I am not sure if it is part of the option for the additional 7 MFSV.

Regarding the "best" method for funding, I think a mixture of debt and sale and leaseback should do the trick. Recall that Ezra's strategy is to remain "asset-light", and they will probably try to unlock value through sale and leaseback of these newbuild vessels. The proceeds from the sale of EOC Limited can also be used to finance part of the acquisition, while I think the rest will be through loan financing. EOC Limited is also in a unique position to raise funds through the capital markets in Norway, where they can get higher valuations for such assets.

For GV, note that their operating cash flow is -ve, thus taking on more debt is like financial suicide. For Ezra, the debt is to be used to generate more positive recurring cash flows and it can also generate higher returns (in %) as compared to the interest rate on the debt. This is something like retaining your home loan (as advised by Dennis Ng) so as to invest the monies to get a rate better than the HDB concessionary rate of 2.6% p.a.

Hope this clears some doubts. Cheers ! Musicwhiz

fishman said...

Hi Musicwhiz,

Thanks for clearing up my questions, and ah, good observations! Haha


Anonymous said...

Not sure why EZRA mgt entertained you, guess they have professionals to handle questions from average investors? I thought you might want to try, with your accounting wit, the Pac Andes mgt if their investment, through bonds and equity funding, is justified for the dilution of shares for their existing shareholders, and if so, to what extend should the per share earnings increase? Thanks.

musicwhiz said...

Hi fishman,

Thanks, just my thoughts on the the matter. I am still learning though, so let's share more knowledge in future over such issues.

Cheers, Musicwhiz

musicwhiz said...

Hi Anonymous,

What you may not know is that Ezra's IR is very pro-active and likes to engage shareholders on a personal level. I have contacted Mr. Tan of the company for quite some time now and he is happy to oblige in answering my queries, to the extent that they are not market-sensitive, of course.

I guess I can approach PAH management on the issue you mentioned, but it was already "hinted" during the AGM that EPS will catch up even with the dilution caused by the 1:1 rights issue.

Regards, Musicwhiz