Wednesday, April 16, 2008

Ezra – 1H FY 2008 Results Review and Analysis (Part 2)

To continue my analysis of Ezra’s 1H FY 2008 financials, I shall touch on the Cash Flow Statement in this section as well as give general comments on the company’s plans and prospects. A little will be mentioned on EOC (48.9% owned by Ezra) as well with regards to their expansion and latest news and how the earnings will flow up to the Group level.

Cash Flow Statement Analysis

As Ezra fleet comes on-stream, the Group is increasingly capturing mid-term charter contracts for their new vessels at higher rates than previously. This, coupled with their charters for their older AHT and AHTS, form a good base for which cash inflows can flow into the company, thereby forming a core cash flow base. I would therefore expect to see strong cash inflows from operating activities every period, notwithstanding the fact that sometimes credit may be extended to customers in order to maintain good relations, and this may cause a temporary decline in cash using the indirect method of preparing the cash flow statement. There may also be periods of time where recognition of revenue is out of sync with the actual receipt of cash, hence this is more of a timing issue (an accounting problem) rather than a case of cash flow difficulties.

For operating activities, the net cash inflows for 6 months ended Feb 29, 2008 amounted to S$14.2 million. This represented a healthy cash inflow position but of note was the interest paid of S$5.2 million which was an 82.2% increase over Feb 28, 2007’s S$2.8 million, as a result of higher gearing (taking up of more bank loans). The Group will be taking on its first FPSO in July 2008 and this should contribute strongly to operating cash inflows, thus hopefully the impact of the higher interest costs will be negated.

Under investing activities, there was a receipt of S$203.9 million of cash being the proceeds from the disposal of 51.1% of EOC Limited, leaving Ezra with a 48.9% stake. About S$110.6 million was used for investing in fixed assets to grow the business, thus demonstrating that Ezra is indeed a very capital-expenditure heavy company. As mentioned, the possible downside risk is high if the vessels remain idle (unutilized) or if rates start to fall precipitously.

Interestingly, for financing activities, there was S$21.6 million raised through taking up of more bank loans but this was offset by the payment of S$20.6 million worth of dividends. From the recent declaration of a S$0.05 dividend per share, this means Ezra will be paying out another S$29.3 million worth of cash which will be reflected in the next quarter under cash outflows from financing activities. One should hope that the Group has retained sufficient cash for servicing of loan interest payments and to finance their new vessel construction, in view of the high dividends declared. Obviously, as a shareholder, I would prefer if the company reinvested the dividends towards growing the business; but I trust that Ezra’s Management is prudent enough to manage their cash flows well to ensure they are adequately covered.

Review of EOC and Discussion of Potential

EOC is the production and construction arm of Ezra and is now 48.9% owned by them after an exercise was conducted back in FY 2007 to sell part of EOC to raise cash. EOC owns Lewek Chancellor (their second accommodation crane barge) and Lewek Champion (accommodation, construction and pipelay vessel), which were delivered in 2H FY 2007 to them. On April 8, 2008, EOC reported an interim net profit of US$12.4 million for 1H FY 2008, up 318% from US$3 million in 1H FY 2007. Of this, Ezra recognized S$7 million worth of the net profit (not a direct 48.9% of US$12.4 million as the net profit was probably staggered, and also depending on exchange rates used) as share of profits from an associated company.

Looking forward, EOC is expecting to take delivery of its first FPSO in July 2008 and this is expected to contribute strongly to its 2H FY 2008 results. Mr. Lim Kwee Keong, CEO of EOC, has mentioned that the FPSO will add breadth to EOC’s services and allow it to open a new and growing market for the Group. Mr. Lionel Lee, MD of Ezra, has also mentioned that EOC intends to add one new FPSO every 12 to 18 months. Ezra is currently bidding for FPSO and FSO contracts worth over US$800 million, and there are increasing signs of higher profitability in recent bidding and contract awards.

EOC’s track record has been very impressive, with the recent Galoc Field project in the Philippines being completed by Lewek Champion on time and without lost time incidents (as reported on EOC’s website on April 15, 2008). In Jan 2008, EOC also successfully completed the installation of jackets, topsides, pipelines and FPSO moorings for a platform located in the Bualuang Field in the Gulf of Thailand (contract awarded by Green Fields International).

With these plans in mind, the future looks promising for EOC to build itself up as a premiere provider of quality service which requires a high level of technical and project management capability.

In Part 3 of my review, I will be touching on Ezra’s segregation of its business units, the new Energy Services division and also plans for its Vietnam fabrication yard business.

Update - A comment from a reader mentioned including ROIC (Return on Invested Capital) and FCF (Free-Cash-Flow) levels for Ezra. I will be adding this in Part 3 after I do my requisite research for my write-up. I would like to thank this reader for his suggestion to enhance my analysis of the company (I had planned to do this for some time but was procrastinating - a human flaw).


Anonymous said...

Hi musicwhiz.

Been following your blog (I suggested benchmarking your returns). Another thought: how about a paragraph summarising 1) free cash flow for the FY, 2) return on invested capital (how much in cash the company generates for each dollar of invested capital), 3) estimate of growth rates (range). This will help us move closer to calculations of intrinsic value.

musicwhiz said...

Hi there,

Will gladly implement your suggestion, but expect a bit of delay as I have been busy these last couple of days and will probably only proceed with Part 3 after attending the AGM of CFG and Swiber. Thanks for your comment !

However, for growth ranges, this is still highly subjective as a business can be subject to all sorts of unexpected hiccups etc, so I can just give a rough estimate.