Friday, October 19, 2007

Ezra – FY 2007 Financial Results Analysis (Part 1)

On October 16, 2007, Ezra reported their FY 2007 financial results for the year ended August 31, 2007. I shall split my analysis of Ezra’s financials into two separate postings, namely one focusing on the Income Statement and Balance Sheet while the other posting will concentrate more on the Cash Flow Statement and future strategies and prospects of the Group. A brief analysis of EOC Limited’s (listed on Oslo Bors) results will also be done in due course.

Income Statement Analysis

Please refer to the table below for a summary of the salient points within the Income Statement:-

As can be seen, revenues surged 98.3%, mainly due to contributions of 12 months from 3 AHTS Lewek Stork, Lewek Snipe and Lewek Heron and one AHT named Lewek Ruby. The inclusion of a few months of operation of 7 new AHTS had also boosted up revenues for 2H FY 2007. On the EOC side, revenue contributions came from a few months of recognition of Lewek Chancellor (Accommodation barge), Lewek LB1 (Launch Barge) and Lewek Champion (pipe-lay barge). Since Ezra has now sold off 51.1% of EOC Limited, the profit contributions from the barges and the future FPSO will only be limited to 48.9% and will be equity accounted for as “share of profits from associates”. Since only a few months of profits were recognized for FY 2007, coupled with the fact that the new FPSO will come on board in FY 2008, the impact to profits from the sale of 51.1% of EOC should not be material (incidentally, this was also mentioned by Mr. Tan Tat Ming during the EGM but I now understand it more fully). Revenues from the Marine Services division also increased due to increased activities in engineering and contribution from Ezra’s 100%-owned subsidiary Saigon Shipyard. With the clinching of contracts worth US$130.1 million, this division is set to grow even more in FY 2009 and beyond (more on this in a separate posting).

Gross profit margin had fallen from 36.6% in FY 2006 to 34.9% in FY 2007, which represented a 1.7 percentage point decrease. This was due to some third-party charter of fabrication and construction expertise as Ezra’s Saigon Shipyard is not fully operational till FY 2009. Other than this fact, gross margins should have stayed fairly constant, which implies that all Ezra needs to do is to ramp up their top line in order to increase their gross margin by the same %. Mr. Lionel Lee had projected that day rates for charters of deepwater vessels would be on an uptrend as these vessels are in great demand (with short supply) and there are very few new vessels of such builds (i.e. 27,00 bhp and higher) in the market currently. The increased day rates would be a positive catalyst for the Group to improve their gross margins even further. Also, once Saigon Shipyard is fully operational, margins will start to improve as the Group is able to deliver the entire value chain by vertically integrating their operations.

Exceptional items made up quite a large chunk of the net profit of the Group, and must be removed in order to get an accurate representation of the Group’s performance with respect to recurrent net profit. After stripping away the exceptionals, it appears that Ezra’s core net profit grew about 42.5% from S$24.2 million to S$34.5 million. While this may not sound very impressive, remember that most companies can only manage to consistently increase their bottom line by about 20-30%; also, Ezra has only recognized a few months of contribution from the larger vessels such as the pipe-layer and the accommodation barge. In addition, their largest asset to date (Lewek FPSO 1) will only come on-stream in FY 2008 and begin contributing about half a year’s worth of revenue and profit for FY 2008 (through 48.9% owned EOC Limited). As long as there is consistent recurring profit growth of at least 20-30% per annum, I will be satisfied as a shareholder. Of course, Management must also endeavour to increase gross margins and reduce operating expenses all the time in order to achieve even better net profit margins.

Taxation increased by a whopping 340% mainly due to taxation of an overseas subsidiary (I suspect this refers to Saigon Shipyard as it has recently started contributing to the Group’s bottom line). The other vessels are operating in international waters and are only subjected to withholding tax.

Balance Sheet Review

A quick glance reveals that available-for-sale investments amount had increased by nearly ten-fold from S$10 million to about S$102 million. Recall that on April 10, 2007, Ezra acquired a 21.83% strategic stake in SGX-listed Ezion Holdings (formerly Nylect Technology Limited). This was made up of 50 million shares at S$0.331 each for a total of about S$16.55 million. By right, Ezra should equity account for Ezion in its balance sheet as investment in associated companies; but it could also be classified as available-for-sale if it is meant to be a long-term investment (as opposed to held-for-trading where marked-to-market gains have to be taken to profit and loss account). As at the balance sheet date of August 31, 2007, Ezion’s closing price was S$1.91, effectively valuing Ezra’s stake in the company at S$95.5 million. This may be the reason for the almost ten-fold increase in AFS investments.

Current ratio stands at 1.43 for FY 2007 as compared to just 1.16 for FY 2006. This is mainly due to increases in assets held for sale and also the addition of the assets of EOC Limited (which have been classified under a separate category of “disposal group assets” due to Ezra’s disposal of its 51.1% interest). The MD did mention in an interview that the Group was planning to make capex of up to US$1 billion in the next 2-3 years; thus Ezra needed a strong balance sheet moving ahead in order to successfully carry this out. Excluding EOC’s assets, current ratio would only be 1.13 for FY 2007, comparable to that of FY 2006. However, after the unlocking of value from EOC Limited, this should increase the current ratio significantly and help to reduce gearing further. Debt-equity ratio stood at 0.9 times before the disposal of EOC and is set to be reduced further to 0.5 times in FY 2008. Note: the impending sale of their 3 million treasury shares (at a minimum price of S$5.60) should also provide a small boost to their current assets and can be used for working capital requirements.

In Part 2 of my review, I will comment on the Cash Flow Statement as well as Ezra’s future plans and strategies for growing their business. Hopefully, the company can come up with some presentation slides which will assist me in analyzing their strategies ! Also, I plan to do a review of EOC Limited’s financials and future plans but this is tentative at the moment.


Simon said...

Hi MW,

Great piece of work!

Ive got a few questions though.

1. Any possible explanation for the sharp drop in the share profit of JV companies?

2. I still don't quite get it when you say 'the impact to profits from the sale of 51.1% of EOC should not be material'. Do you mean the future increase in revenue and profits from EOC will compensate for Ezra's reduced stake in EOC itself?

3. I see that Ezra's stake in Ezion has generated quite a lot of unrealised profit and I presume would be included as a component of shareholders' equity. May I know your treatment of this component when doing your financial results analysis? Would you strip it off when calculating the equity ratios (e.g. ROE, DE)?


musicwhiz said...

Hi Simon,

1) For this line, I believe Ezra did go into some JV with KS Energy some years back to co-own some rigs which they agreed to jointly work on. I guess that by FY 2007, these JV no longer contribute any significant profits. It was, however, not mentioned in the results announcement, thus I am just making an educated guess.

2) Yes, that is more or less what I mean to say. Looking at it from a purely profit perspective, the contributions from Lewek Chancellor was 160 days in FY 2007 and only 20 days for Lewek Champion. Thus, it really did not constitute anything significant for FY 2007. For FY 2008, they will have a full year's contribution which should offset the 51.1% sale of EOC (i.e. recognition of only 48.9% of the profits of EOC).

3) Actually, for Ezion, the "unrealized profit" component is realizable anytime in the sense that Ezra can choose to sell off a chunk of Ezion at close to market price (obviously, a discount would need to be factored in). Thus, I would still include it in to calculate ROE as it is not just a book entry but has some basis. You are free to offer a different perspective though. :)

Thanks too for your comments !

Regards, Musicwhiz

fishman said...

Hi Musicwhiz,

Thanks for sharing so much!

Your blog has ceratinly grown more educational over the months! Still trying to digest much of what's shared and said.

Myself I'm still learning the ropes and know nuts about Ezra, except that it's doing well since restructuring!

Good luck hunting and look forward to your next post!


musicwhiz said...

Hi Fishman,

You are most welcome ! Thanks for visiting too !

Regards, Musicwhiz