Tuesday, October 23, 2007

Ezra – FY 2007 Financial Results Analysis (Part 2)

To continue the financial results review for Ezra, I will continue with the review of the Cash Flow Statement and also the future prospects and strategies for the Group. Unfortunately, there were no presentation slides released by Ezra relating to their results announcement, which is rather uncharacteristic of the company because they are traditionally known to be very shareholder-centric and they have a habit of keeping shareholders updated on the status and progress of the company. Thus, the future prospects of Ezra are compiled from data and information obtained from sources such as the Business Times, Channel Newsasia, The Straits Times as well as The Edge Singapore Magazine.

Cash Flow Statement Review

Ezra reported net cash inflows from operating activities of S$33.5 million for FY 2007, which is a strong indication of recurring cash flows from their core business. This was a 67.5% increase from the cash inflows generated for FY 2006 of S$20.0 million. Starting from a higher net profit before tax base of S$115.1 million, non-cash items such as the gain in dilution of interest in subsidiary and profit from disposal of AFS (available-for-sale) investments had to be removed from the cash flow statement. Depreciation on fixed assets almost doubled from S$4.6 million to S$9.2 million and had to be added back as it was a non-cash expense. Operating profit before working capital changes actually amounted to S$58.7 million for FY 2007 as compared to S$27.8 million for FY 2006; registering a gain of 111.1%. The main culprits for the cash outflow were the huge increase in trade receivables (from S$1.4 million to S$48.0 million) as a result of the scaling up of their business from their enlarged vessel fleet. This was partially offset by the decrease in other receivables but the net effect is still a S$28 million outflow resulting from changes in receivables. This prompts the question of whether the company can maintain a good cash collection cycle as it seems that much of their receivables may yet be uncollectible as at year-end. Fortunately, this factor was mitigated by the cash inflows from the increase in trade and other payables of about S$30.7 million which enabled the company to maintain a healthy overall net cash inflow. Interest and taxes paid also increased as compared to prior year as a result of higher interest on more loans taken up to finance the purchase of new vessels; as well as higher taxes from the overseas taxation of a subsidiary company (which I suspect is HCMC Logistics in Vietnam).

Cash flows from investing activities showed a huge net outflow of S$314.6 million, mainly due to the purchase of fixed assets which came up to a whopping S$300 million. This was more than double of FY 2006’s purchase amount of S$117.5 million and clearly shows Ezra’s commitment to building up its fleet rapidly to take advantage of the buoyant oil and gas industry. Assets purchased and held for sale also increased from S$55.6 million in FY 2006 to S$92.3 million in FY 2007, while the S$22.1 million worth of cash outflow from the purchase of AFS investments would include the 21.83% stake in Ezion Holdings Limited. Although the impact on cash is worrying if one looks at the net cash outflow for FY 2007, note that most of Ezra’s fund raising comes through in the “financing activities” section, which will be explored below. Also, do note that Ezra’s stake in Ezion Holdings has appreciated more than 450% from their purchase price of 33.1 cents per share to S$1.49 as at October 19, 2007. This means that their stake in Ezion is now worth S$74.5 million which is realizable in cash should they wish to sell their stake for cash.

The cash flows from financing activities is where all the “action” is. Ezra has been busy during FY 2007, as they have obtained more banks loans of S$223 million, procured cash of S$62.2 million from the sale of 12% of their subsidiary EOC Limited and also placed out 15 million shares at S$5.18 per share to raise S$76.6 million (net of placement fees). These activities have no doubt managed to generated sufficient amounts of cash for operating purpose and also for fleet expansion, but there is of course a price to pay. Taking up additional bank loans means increasing their gearing and debt-equity ratio; and it also increases interest expenses. Diluting their interest in a subsidiary would mean the recognition of lower profits from as part of the profits belong now to minority interests; while the issue of new placement shares to strategic investors dilutes existing shareholders and lowers EPS. All these moves were undertaken with the implicit assumption that fleet expansion would lead to higher revenues and hence profits, in order to offset the dilution from sale of subsidiary and issue of new shares. An expanded fleet should also generate increased recurring cash flows which would be used to service the higher interest expenses and to eventually pay off the principle amount of the additional loans.

As can be seen from the above analysis, there are inherent risks moving forward into FY 2008 about Ezra’s cash flows, as most of the current inflows are generated from financing activities, and not operating activities. Thus, if their expansion should stall in any way or if charter rates go on a downtrend, the Group could possibly be “squeezed” in the middle as they will end up having lower revenues but higher loans to service. This is the risk of rapid expansion which all shareholders have to bear; and if the company is on track to take advantage of buoyant conditions, then the cash flows would be sustainable in the long run. Do note that subsequent to the financial year-end, Ezra had sold off another 39.1% of EOC Limited to generate gross proceeds of USD 177 million (about S$259 million at today’s exchange rate). This is in part to finance the purchase of deepwater vessels which Ezra has placed orders for; but the company will have to think of other ways of raising more cash if it intends to scale up its fleet, as I perceive that this amount will be insufficient moving forward (see future prospects and strategies for my ideas on how Ezra will make up this shortfall in cash).

Future Prospects and Strategies for FY 2008

In writing about the future prospects and strategies to be used by the Group, do note that some of my opinions may contain forward-looking statements which may or may not represent fully the direction to be taken by the company. Thus, my disclaimer is that I am neither recommending nor discouraging anyone from buying or selling their stake in Ezra.

1) Fleet Expansion and Fund Raising - Ezra plans to continue to expand its fleet to take advantage of buoyant conditions within the oil and gas sector. They have already ordered two 30,000 bhp AHTS for deepwater exploration, a second pipe-lay barge and a multi-functional support vessel (MFSV). It was mentioned that the Group has the option to purchase 7 more MFSV and that this option will be exercised before the end of 2007. Since one MFSV costs S$162.4 million, this would imply that 7 more would cost close to S$1.14 billion ! Mr. Lionel Lee (MD of Ezra Group) had mentioned that the Group will be spending close to US$1 billion from now till FY 2010 to expand its fleet, but he did not give details on how this was to be funded. One option I can think of offhand is for EOC Limited to do fund-raising exercise through the issue of new shares of EOC Limited, thereby diluting Ezra further but in the process raising enough capital to take over the new assets. Similarly, Ezra itself could also draw down more debt or issue new shares in order to raise funds from the capital markets here in Singapore. Another attractive option would be to engage in yet another round of sale-and-leaseback transactions for the newbuild vessels, which was the asset-light method employed by Ezra that enabled it to grow its fleet from FY 2003 till now.

2) Fabrication work to be undertaken by Saigon Shipyard – Ezra is now expanding its scope of business by venturing into the platform fabrication business spearheaded by its 100% owned HCMC Logistics Pte Ltd, which owns Saigon Shipyard in Ho Chi Minh City, Vietnam. On October 16, 2007, the Group announced that the shipyard had won US$130.2 million worth of contracts. Mr. Lionel Lee expects that this area of business could potentially generate “S$150 to S$200 million worth of revenues” by FY 2009, but conceded that margins were lower as compared to their more lucrative vessel chartering business. With the recent contract win, HCMC Logistics seems poised to capture more contracts in future and generate higher value for the Group. Separately, it was also revealed that another shipyard was being built and readied at Vung Tau (a 2-hour drive from HCMC) to handle the additional capacity as the Saigon yard would be running at full capacity by FY 2009. There is much optimism from myself that this area of business could potentially contribute more recurring cash flows for the Group to fund their working capital requirements.

3) Clinching of more FPSO deals – EOC Limited’s other growth driver will be the clinching of its second FPSO deal, after the Group became the first Singaporean company to manage an FPSO. The company is looking to add one new FPSO to its fleet per year and according to The Edge Singapore, they are currently bidding for such contracts worth S$1.18 billion. If they manage to clinch one in FY 2008, delivery will most likely be in late FY 2009 or early FY 2010 (recall that they announced their first FPSO in late CY 2006 and it will only be delivered in 2H FY 2008). Though financing it will be an issue, albeit not a very worrisome one as EOC can raise its own capital in Norwegian markets, the earnings accretion for the Group should still be significant even if it only owns 48.9% of EOC Limited.

4) Charter Rates for Deep-water vessels – Charter rates are projected by Mr. Lee to be on an uptrend for deepwater vessels as there is currently a shortage and the first few such vessels will only be delivered in FY 2009. He predicts that demand will outstrip supply and therefore gross margins should be very good when these vessels are delivered to Ezra.

5) Role of Ezion Holdings – Up till now, the exact role of Ezion Holdings in Ezra’s game plan is still unclear. The question is how is this little-known company going to create synergies for Ezra’s core business; or will it be used to undertake other forms of work which EOC or Ezra will contract to it ? Hopefully, more will be revealed soon.

The next update from Ezra should come when there is more news of the bonus issue and/or dividend payment dates. Also, the Annual Report can be expected some time in December 2007 as well as the AGM.


Anonymous said...


Sorry I post this as a sideline. TOday I looked at STX PO's movement and I am totally, grossly disappointed by our Singapore market. All speculators, no fundamentals.

Our funds industry is still not as developed as the US. I have made up my mind to pull 3/4 of my funds back to the US to invest in US stocks.

In case you are interested in US stocks, I do recommend you look at DRY BULK sectors. I currently own Diana Shipping and used to own the following stocks in the dry bulk section - Dry Ships, Excel Maritime.

Dry ships I let go too early after a double, from $44 to $86 in 3 months.

If you want a good Singapore bulk shipper, check out Courage Marine if you are every interested. Extremely clean balance sheet, earnings on the rise. I expect their 3Q earnings to be >50% from last year.

Once the next correction starts and I sell off all my Singapore stocks, I will put 3/4 of my money back to the US.

BTW, I am just curious. Which line are you in and what got you interested in stocks?

Have a good one.


musicwhiz said...

Hello MM,

I would certainly agree that some stocks are filled with speculators and no one invests based on fundamentals. But it could also be that the real investors are just sitting around sipping coffee and letting the punters fight it out ? :)

The mutual funds industry is definitely more mature and well-regulated in the USA, and I guess it would be a better place to place your money. But for me, I got a concern about exchange loss as the USD is weakening against the SGD now. As of this writing, I think it is about USD 1 to SGD 1.463.

I will take up your recommendation to look into the dry bulk sector, though I do not understand it too well. I will also look into those companies you mentioned; but could you enlighten me on where I cna go to find the equivalent of SGXNet in the USA ? I need to check out Annual Report, quarterly filings and news releases (if any) as well as read up more on the companies. I will not invest in a company which I do not understand.

Courage Marine has been on my watchlist, incidentally. I understand that it has no debt and is trying to build up its fleet of bulk carriers ? I was thinking that growth may be in stops and starts though, but as I do not know the sector very well I am not qualified to comment. I will still invest based on valuations for Courage, but I need to know the earnings visibility moving forward and whether Courage can capture a significant slice of the pie (and whether they can get decent margins by doing so). Perhaps you can share some insights on this industry ?

The next correction might be around the corner. I will not bet that STI crosses 4,000 anytime soon, and have more reason to wish for bearishness so that I can load up more.

I am in the finance/accounting line and it was my father who got me interested in shares. However, he has no investing philosophy and tends to react on emotions, tips and rumours. When I stumbled upon Warren Buffett and Ben Graham, the rest is history LOL.....!

Have a great week to !

Regards, Musicwhiz

Anonymous said...

Hi MW,

Just like you have done your homework, I have done mine, just lazy to publish it ;-)

If you do decide to take a stake and have made money, kindly consider donating a small portion to charity to make this world a better place. This is what I tell all my friends who have benefitted from my calls.

Our analysts in Singapore are terrible. Back in May, they claimed that BDI at 5000 is an anomality and cannot be susbtained and that Courage Marine was fully valued at 0.28. Currently the BDI is >10000 now. I am just saddened that they have not done their homework....

There are a few websites I used. They have neatly provide for FREE the reports.



Also bearing in mind I subscribe to IBD.

Anyway, the dry bulk section is driven by supply/demand for iron ore, grains etc... The no. of dry bulk ships is getting constrained and new ones are coming on board only in 2H08. That is when this party will start to end. Before that, all coast is clear. I will post an article for you to make sure you have a better understanding.

The BDI(Baltic Dry Index) is a good measure of the rates that each route is worth. Here is the website to get it. You might want to read up more.





Smiling Dry-Bulk Shippers See The Boom Times Lasting For Years


If anyone knows about the perfect storm, it’s dry-bulk shipping companies that ply the Seven Seas.
They haul iron ore, coal, grains and other bulk commodities.
Thanks to a convergence of factors — including the growing needs of China and other developing nations — they’re also raking in more cash than ever. Charter rates are at record highs.
“We’ve already surpassed profits from last year,” said Eleftherios Papatrifon, chief financial officer of Excel Maritime Carriers EXM .
Along with other dry-bulk shipping executives at an industry conference put on by Jefferies & Co. in New York on Wednesday, he predicted 2008 would be another banner year.
Others said the dry-bulk boom could last even longer.

Upbeat Comments

The upbeat comments came from some of the bigger dry-bulk companies, such as DryShips DRYS and Eagle Bulk Shipping EGLE , and smaller outfits, including startup Ocean-Freight OCNF .
They had their reasons, and not all of them pointed solely to China.
“We think the market is undervaluing India,” said Sophocles Zoullas, Eagle’s chief executive.
Citing a massive urban infrastructure project just getting underway in 62 second-tier cities in India, he said the need for steel and concrete will explode over the next several years.
Iron ore is needed to make steel, and prices are already at record highs. Shipping titans say industry buzz has iron ore rates going up 20% to 25% next year.
Demand for iron ore certainly isn’t slowing elsewhere, either.
China continues to suck in much of the available supply from key source countries such as Brazil and Australia, leaving many other customers scrambling for what’s left.
The supply crunch often means customers must tap into more distant sources, meaning longer ocean voyages — and more revenue — for shipping firms.
China also became a net importer of coal for the first time this year. In itself, that’s good news for dry-bulk business. Also, like iron ore, coal customers besides guzzler China are pressed to bring in supplies from longer distances than usual.
“Charter rates are setting all-time highs on a daily basis,” said Douglas Mavrinac, managing director and lead maritime analyst at Jefferies.
The average spot rate for large capesize ships averaged $150,000 a day last week, while smaller panamax boats fetched an average $75,000 per day on the spot market, according to Jefferies.
While its outlook on the crude oil and product tanker market is cautious over the next two years, Jefferies’ view of the dry-bulk shipping market over that time is favorable.
In addition to strong demand for iron ore, significant new supply is coming out of Australia and Brazil to meet it, Mavrinac says.
“So there’s more to ship,” he said. “So much so, it’s outstripping the number of new ships being delivered from shipyards.”
Port congestion is adding to the vessel supply crunch. The long waits to unload in ports has reduced dry-bulk vessel capacity by more than 11%, said Diana Shipping DSX President Anastassis Margaronis.
In India alone, he said, port capacity must increase by 130%. That’s not likely to happen anytime soon.
Said OceanFreight CEO Robert Cowen: “The whole logistics chain is being pulled tight.”
To keep up with demand, dry-bulk operators are stepping up ship orders.
In July, Eagle Bulk announced it would spend $1.1 billion to buy 26 new supramax vessels — the smallest type of dry-bulk ship, for delivery starting next year through 2012. The firm acquired 39 other ships in the last two years for $1.5 billion.
TBS International TBSI expects delivery of four new ships later this year through the end of 2008. It has contracted for six new ships to be built in China for its core Asian and South American markets, at about $35.4 million each, with delivery expected in 2009 and 2010.
“These ships are sorely needed, especially as globalization goes forward,” TBS’ CEO Joseph Royce said.
Golden Ocean Group, listed on Norway’s stock exchange, has ordered 23 vessels for delivery between 2008 and 2010.


Since overcapacity is an ongoing concern in the dry-bulk business, the higher number of deliveries slated for 2009 and 2010 caused some to question the potential for rate drops.
But shippers waved away the concerns.
“Demand is overwhelming and will be from 2010 and beyond. You haven’t seen the full strength of India,” said Quintana Maritime
QMAR Chief Executive Stamatis Molaris.
Not all of the boom in business comes from iron ore and coal. TBS transports all kinds of dry cargo, from fertilizer to finished steel. TBS’s Royce said renewals from customers are “at higher (rate) levels than anytime in the past.”
Jeffries’ Mavrinac says rates will keep climbing through 2007, and that 2008 rates should be higher than in 2007.
Since they are more volatile, spot rates are typically higher than fixed rates. For now, firms that have more spot-rate exposure, such as Dry-Ships, can “maximize their returns,” Mavrinac said.
DryShips’ Chief Executive George Economou said 98% of the firm’s fleet next year will be left unfixed “to take advantage of the strong environment.”
Genco Shipping GNK is in the middle. It uses a balanced approach of both spot and fixed contracts.
Quintana’s Molaris said his company has been criticized for its emphasis on fixed-time charters “in this boom market.”
But he said, “We run the company to minimize market risk. We have significant upside potential for the risk we take.”
Eagle Bulk also has a higher degree of fixed charters than spot-rate deals. But since renewals are likely to be priced at higher levels, as Mavrinac says, the company isn’t shifting gears.
“This is the first time I’ve seen in my career charterers coming to us and asking for packages,” Eagle Bulk’s Zoullas said. “Charterers are saying, ‘Give us more years.’ ”

Thanks to exploding demand, especially in Asia, and a limited number of big ships, dry-bulk shippers are in the sweet spot of their business cycle.

musicwhiz said...

Hi MM,

Thanks for the links, I will keep them in mind when researching on USA companies in case I intend to invest there in future. Currently, I got my hands full with SGX and am seriously considering "hiring" an assistant to help me do my research as there is simply too much to cover ! If I devote too much time to research and investing, I know I will neglect my personal life. I guess I want the best of both worlds hahaha. :P

Thanks for mentioning the BDI. I was aware of it all along but don't know how the analysts got it so wrong. But then if it really was so high, is there a chance it will reverse or go even higher ? From what I heard, China's insatiable demand for goods has driven up this BDI to record levels, and demand is not going to recede anytime soon. There could possible be more upside but how much more for the companies in this industry ? This is a question I have to assess on my own.

Have a great week yourself !

Regards, Musicwhiz