Monday, January 21, 2008

Ezra - 1Q FY 2008 Results Review and Analysis (Part 1)

Sorry for the lack of updates as I was in Penang over the weekend and spent nearly 18 hours in a coach ! It was really tiring and even when I got back on Sunday yesterday, all I could do was to reply some comments before I just hit the sack and slept through the night. Anyhow, here is the first part of the review and analysis of Ezra's 1Q 2008 financials. The second part will, as usual, involve more of the prospects and future strategies of the company and Group.

Profit & Loss Analysis

Ezra reported a net profit (excluding exceptional items) of S$16.6 million, which was a 270% rise as compared to 1Q 2007. Exceptional items would include the gain on divestment of EOC of S$197.9 million (which they listed on Oslo Bors and now hold 48.9% of), a one-time provision of S$19.1 million (more on this later) and also sale of exclusive use rights of a vessel of S$1.29 million. The very positive news is that gross margins were lifted to 41.9% from just 32.1% in 1Q 2007, as increasing charter rates lifted Ezra's margins. Revenues increased by 110% while COGS only increased by 80%, resulting in a gross profit of S$28.2 million (an increase of 174%). Administrative expenses increased quite a bit from S$4.2 million to S$26.8 million but this was inclusive of a one-time provision of S$19.1 million for the staff incentive scheme. This scheme was introduced by Ezra in order to retain top talent for its growing fleet and also to recruit and train new staff as the Group's operations expanded regionally. More details of this scheme will be announced as Management irons out the details and I have already sent an email to their IR department requesting for details of this provision (which is why I am detailing it only now as I have only recently received their reply).

Financial expenses increased by 139% to about S$3.3 million, mainly as a result of the increased financing which was necessary in order for the Group to expand their fleet. Ezra have conducted 2 rounds of sale and leaseback thus far with a financing company and I feel that they may once again use this model if it helps them to realize cash upfront and to keep their balance sheet light. This has been their policy even for EOC Limited, which is why they divested part of it. Net margins stood at 24.7% which is healthy (I have used S$16.6 million profit to compute net margins), as opposed to net margins of 14.3% for 1Q 2007.

Balance Sheet Review

Ezra's Balance Sheet looked significantly lighter after the divestment of EOC, as they are only equity accounting for the profits from EOC as an associated company; thus they do not have to consolidate EOC's assets into their Balance Sheet as well. Of note is the S$47.4 million in long-term receivables from an associated company. This should comprise the remainder of the gross consideration of S$263.2 million from their divestment in EOC (after taking into account S$1 million in listing fees and paying professional fees to the listing Manager who helped to arrange the deal). Note also in the cash flow statement that there is a receipt of about S$200 million in cash from the proceeds of disposal of subsidiary company.

As a result of this divestment, Ezra has strengthened its cash and bank balance significantly, from S$17.4 million as at August 31, 2007 to S$178.7 million as at November 30, 2007. These funds are essential in order for Ezra to fund their purchased of 4 MFSV which are due to be delivered in FY 2010, and also for hiring more manpower and increased running costs as more vessels come onboard. Their FPSO will be delivered in July 2008 (4Q FY 2008) and I will elaborate more on that when I do a review of EOC's 1Q 2008 results and presentation slides.

Importantly, debt to equity ratio has fallen from 0.9 times as at Aug 31, 2007 to only 0.3 times as at Nov 30, 2007 while interest cover (meaning cash divided by interest expenses per month) has increased to 59.4 times as a result of the infusion of cash. I will elaborate more on the cash flow statement analysis in Part 2 of the review.

In addition, Ezra has also managed to sell 5,436,000 shares in the open market, as a result of their wrong purchase of 3,000,000 shares (pre-bonus) at S$5.60 without shareholder's mandate. They have 564,000 shares remaining to dispose of at a minimum of S$2.80 per share. They also purchased 5,436,000 shares from the open market and intends to hold these shares as treasury shares for their Employee Share Incentive Scheme.

I will elaborate more on Ezra's Cash Flow Statement as well as their plans and prospects for FY 2008 in Part 2 of the review due tomorrow.


Anonymous said...

Hi MusicWhiz

Thanks for your insightful analysis. Ezra has established themselves to be a sound company with strong balance sheet and good growth. However, with the current poor market sentiments, even the price of a good stock such as Ezra will fall. Just today, Ezra fell 14% to $2.22. May I know in your view, what would be a good entry price to invest in Ezra that would provide a margin of safety? Regards.

musicwhiz said...

Hello Anonymous,

Thanks for visiting. I think it would not be very proper for me to suggest any price for a margin of safety, as I am vested and may not be fully objective. As such, I can suggest waiting for a price below S$2.00 for good margin of safety. But, all things said, one should still maintain a long-term view and be prepared for further volatility (meaning short-term losses) before the true value of a company shows. Patience is a virtue in the stock market, and it is only recognized by market participants after a severe correction or crash.

Regards, Musicwhiz

faith-to-believe said...

Hi, since you've been studying Ezra, would you be able to enlighten me why the nose dive in Nov fr. $7 to under $4? What's the catalyst?
I am looking to buy a property stock, do you think Ezra is a good bet? I already own Capitaland at it's high at $8, wondering if I should average down on Capitaland or get another property stock. Thanks

Simon said...

hi faith-to-believe,

sorry to tell you, but if you think ezra is a property stock and you are saying you bought Capitaland at S$8 and still holding it, i think u should go back to your study room, study your stocks more closely for a few more months and then only start trading. It's pretty brutal in the stock market now. Your study room is safer.

musicwhiz said...

Hi faith-to-believe,

Since Simon has already answered, I will keep my reply short.

First off, I agree with Simon that you should seriously do more research on a company first to at least be able to know its principal activities ! That is the utmost basic info you should know about a company (i.e. what industry it is in and what its business is about). As for why the price has dived, I have NO IDEA as I do not control Mr. Market and his emotions. What I do know is that valuations get more attractive as price gets lower, and as investors we should seek out margin of safety once we are certain of a company earnings stream and future prospects.

I would advise you to examine Capitaland and its business, as well as its strategies and expansion plans, in order to value the company properly. I am not in the position to give advice on any company as I am not a qualified financial adviser, hence I hope readers can take the initiative to do their own objective reading to enhance their knowledge. To me, too much spoon-feeding will ultimately harm, rather than help, a person.

Regards, Musicwhiz

musicwhiz said...

Hi Simon,

Yes, the market is very brutal and this is why we should insist on a margin of safety when we buy, otherwise such crashes and corrections can make one a lot poorer in the long run.

Regards, Musicwhiz