Thursday, October 23, 2008

Ezra - FY 2008 Review and Analysis

Ezra released their FY 2008 results yesterday, and I also took the opportunity to purchase more shares at 59.5 cents to add to my existing holdings. I will be doing a brief review here (not too detailed la) based on their financials, press release and powerpoint presentation. I will also be tackling some very pertinent questions raised by a forumer named "amigos" in the Channel News Asia forums. He obviously delved quite a bit into the industry and asked some good questions about the Group which I would like to address. Hence, I will be copying/pasting his questions on my post and providing the replies to address the relevant issues here.

Profit and Loss Analysis

The good news is that top line has grown 87% from FY 2007 to FY 2008, but this was largely expected with the delivery of more vessels thus contributing to higher recurring revenues for the Group. Also note that the Energy Services division made its maiden revenue contribution of US$29.2 million, though net margins for this division were low at 12% (resulting in a contribution of "just" US$3.5 million for FY 2008. Sales for the Marine Division nearly doubled to US$64.2 million while the offshore chartering division contributed about US$174.9 million to revenues.

Note that gross margins have fallen as a whole for Ezra from FY 2007 to FY 2008, from close to 35% in FY 2007 to just 29.6% in FY 2008. From Page 7 of their results presentation, it can be seen that gross margins for offshore and marine divisions had dipped slightly; probably due to the delays in the delivery of vessels during FY 2008 which meant that Ezra had to charter third-party vessels to complete certain projects. Their Vietnam Yard also could have started off later thus contributing to higher costs (recall that Vietnam's economy is also in the doldrums). I will clarify these issues at the upcoming AGM. As a result of the new division coming on-stream, this had the effect of lowering the Group's total gross margin. Moving forward, the recent news of Ezra winning US$104 million worth of charters for 4 vessels at rates 10-15% higher than previously attests to the continued demand for their vessels; hence gross margins should stay fairly stable around this level.

Let's take the pure recurring net earnings as a basis for comparison, as the FY 2007 and FY 2008 numbers contain a lot of one-off exceptional gains and items like write-offs, provision for forseeable losses, doubtful debts and exchange losses. I draw readers' attention to Page 5 of the presentatio slides which shows recurring PATMI of US$49.9 million for FY 2008, an increase of about 55% over the PATMI of US$32.1 million for FY 2007. Using this figure, net margins for FY 2008 stood at 18.6% while net margins for FY 2007 were 22.4%.

Balance Sheet Review

For the Balance Sheet, I must say it's more well "fortified" now against possible problems as compared to a year ago. Much of this was achieved from the de-consolidation of EOC from Ezra Group's books, thus freeing up a lot of gearing and taking it off Balance Sheet. Note that EOC, being a 48.9% associate of Ezra Group, has gearing of 2.63x which is extremely high. In a way, the Group has sold shares in EOC to dilute its interests so that the debt can be carried by its associate rather than consolidating the debt into the Group accounts. This reduces the risk in its Balance Sheet and at the same time, frees up cash for the Group to continue their expansion plans.

I would like to draw attention to a few items within the Balance Sheet which have improved over the year, and which have also been highlighted by the Management. Cash and cash equivalents has increased 5-fold from US$24.8 million a year ago to the current cash hoard of US$153 million (inclusive of fixed deposits). This has brought down their net gearing from 37.4% to just 11.5%. Also, Ezra's interest cover has improved from 14.8 times to 29 times, in anticipation of more borrowings to fund their next wave of expansion for the MFSV. The Management is preparing for the higher amount of gearing and anticipates gearing will be slightly less than 1x by the end of FY 2011. Of course, their operating cash flows from recurrent charter contracts should be able to fund part of this capex requirement. Interest cover should remain decent even as the Group gears up, as Ezra has done the wise move of NOT paying dividends in order to conserve more cash.

I noted that Citigroup's report mentions the invoking of a "market disruption clause" which seems to be quite in vogue these days due to the credit crunch; but this is unlikely to affect Ezra very much due to my perception that the inter-bank lending freeze will be short-term in nature and interest spreads (LIBOR) should ease in a few months time.

Current ratio at 1.5x is also healthy as compared to 1.4x for FY 2007.

Cash Flow Statement Analysis

The Group is generating positive operating cash inflows of US$17.4 million compared to about US$22 million a year ago. This reflects the effects of their charter contracts which have managed to provide the Group with steady mid-term cash flows. Most of the rest of the cash came from the sale of EOC, more bank loans raised and proceeds from bills payable. There was negative FCF as Ezra is still in the midst of expanding its fixed asset base; hence investors should continue to see large cash outflows relating to the purchase of fixed assets. Their long-term charters should provide cash flow visibility in the near term, while their building up of cash and absence of dividends is a good signal that Management knows how to manage their cash effectively. Please also see the capex and prospects sections which discuss on cash flow requirements for the Group in the years to come.

Capex and Prospects

Ezra intends to expand its fleet into the deepwater segment in order to cater to oil majors committing more E&P dollars to this growing segment. They aim to be one of Asia's first companies to serve this segment, which is lacking in support vessels and which promises to show healthy growth in the coming years. Note that lower oil prices do not affect the committed capex of huge oil majors such as Shell and Chevron as they have already planned to drill in deeper fields for the last 10-15 years. It is my personal opinion that oil prices will not stay depressed for very long (in other words, it's only temporary) and with the recovery of the world economy perhaps by FY 2010, oil prices should start to trend upward again. The world has finite oil reserves and these are being depleted at an alarming rate. Most of the shallow oil fields are depleted and deeper wells need to be drilled to find oil reserves. This will spur the growth of the oil and gas industry into the future (past FY 2012) unless the industry gets threatened by a credible and cheaper substitute.

Ezra's commited capex for their 5 MFSV and one deepwater AHTS amount to US$650 million, while they plan to spend another US$100 to develop their Vietnam yard(s) at Ho Chi Minh and Vung Tau, Academy and Energy Services division. The Group has secured a S$500 million (about US$333.33 million) loan to finance part of this capex, and the remainder should be funded through internal cash flows. The slides mention that funding has been secured, but more needs to be asked on the nature of this funding and the interest rates on the debt. I will be asking this at the AGM as well.

Note that Ezra's policy has been to construct a vessel only when firm demand has been established for it. This means that a customer would have indicated interest in advance to charter a vessel before Ezra undertakes to construct one. This minimizes the possibility that the asset will be left idle when completed; in fact Ezra's new vessels have all been chartered out upon delivery, and existing ones have also been signed on to new charters (refer to press release dated October 20, 2008). Thus, the committed capex should ensure the Group gets firm charters to justify investing this amount of monies into each vessel.

For Energy Services division, Ezra is currently managing a drilling programme with a client called STP Energy in New Zealand. According to the press release, this is on a cost-plus-basis which means rising costs do NOT affect Ezra's profit margin on this contract. It is unclear what "additional upside" means but I assume it refers to revenues of US$25 million. Using a net margin of about 12%, this translates into potential additional net profits of US$3 million. More details need to be disclosed with regards to the nature of this program, the client and the prospects of the division, and I will clarify this during the AGM too.

For EOC, although gearing is very high at 2.63x, the Company has just recently chartered out its FPSO and heavy lift accommodation barge; hence I expect the recurring cash flows to be able to reduce some of this debt over time. In addition, EOC are said to be the front-runner for an FPSO project in Vietnam; I will check with Management on this again by December 2008.

Replies to Queries raised

A forumer raised some interesting queries on Ezra amid the current global financial gloom (yeah, no better phrase for it, since everybody looks set to jump off cliffs going by the current sentiment). I will present each question/issue and my answer to it in turn. Some of the queries may already have been tackled in the earlier section of this post.

Question: With almost certain economic slowdown for next year, global oil demand will inevitably be lowered to region of $50-60. Based on Ezra's expansion projected forecasts, most of their vessels are expensively built for deep water operations. Now, deep water operations are highly expensive stuff and is only feasible when oil price is high. Facing such a scenerio, where does demand for Ezra's vessels stand? Remember, oil companies will not pay big money for expensive vessels to support shallow water operations (that will still be profitable at $50/barrel)

My Reply: Oil prices are not expected to stay around this level for very long, I estimate probably another 2-3 years, once the recession is over (and yes, it will be over, it just depends on the time taken); oil prices should resume their steady climb upwards. Oil majors have committed capex for drilling and E&P in deeper waters a long time back (even before I invested in Ezra probably); so they will not just "pull the plug" halfway because as oil majors, they need to look for more reserves and the shallow water ones are running out. As such, Ezra only builds a vessel when there is firm demand from a customer (as mentioned above). Their smaller vessels should provide stable charters (recurring cash flows) while the future larger ones can command premium rates as they are newbuilds amid a lack of supply.

Question: Expensive vessels - their capex and debt worry is no joke. Think about it, US$650m for 5 MSFV. Vessels like these have never been that expensive in history and Ezra has built 5 of them. How they're going to pay for them (including finance interest) is a big question mark to me.

My Reply: I would like to emphasize that "vessels like these" are non-existent in history as oil majors have never drilled so deep before, so I am not sure what basis of comparison is being used here. Please note that these are highly-specialized and state-of-the-art vessels with many safety and environmental friendly features incorporated in them. The cost is very high precisely because they are unique and suited to specific environments (harsh deepwater); therefore oil majors should be willing to pay premium charter rates for them because without these vessels, they can't do their E&P effectively. Financing should not be a big issue as the Group has essentially secured funding for the vessels and their interest cover of 29x currently should ensure enough buffer for future finance costs. Don't forget that operating cash flows are coming in all the time and will contribute to the cash flow situation positively over time.

Question: Based on their 4Q earnings of a dismal $6m+, how are they going to run their business with such debt obligation behind them? All the industry players are expecting a major slow-down in the oil and gas sector next year. Will their 1Q09 earnings be worse? I'm not ruling that out.

My Reply: I assume you refer to the earnings after the exceptional items have been factored in ? I suggest to cnocentrate less on earnings per se and more on cash flows, which will be crucial in the coming years as Ezra scales up its fleet. Yes, there will be slowdown in the sector because of the global recession, but this is NOT a permanent and irreversible situation and the oil majors and oil and gas support players should be able to weather this. Even if Ezra's 1Q 2009 earnings dip, I do not see a problem with their long-term earnings and cash flows as I am invested in the company to grow with it till at least FY 2012 when their fleet composition stabilizes. By then, they may be quite a different animal. Don't forget about their fabrication yard, energy services division and their potential FPSO win, all may turn out to be positive catalysts.

Question: Contracts, contracts, contracts - Contracts can be signed, they can be void too. When companies go bust, they don't care if contracts are void or if they're sued. Fact is if a business venture doesn't make money, there's no point continuing in a contract that will only see red. Will Ezra's long term contracts be cancelled due to unforeseen circumstances? I'm not ruling that out.

My Reply: Ezra's clients are large oil majors who have been around for a very long time and are established players in the O&G arena. It is very unlikely that they will "go bust" or the world will have to survive on water as fuel instead of petroleum ! On whether the long-term contracts will be cancelled, oil majors cost of extracting oil is VERY LOW, probably only a few USD per barrel; hence there is totally no incentive for them to discontinue E&P activity just because oil prices dropped below US$70 recently. Support services are an essential part of the oil and gas value chain and oil majors cannot do without them. Try installing a topside platform on your own without the proper equipment, or do winching or well-servicing, and you will know what I mean. It's a symbiotic relationship between oil major and vessel charterers. Each will not want to "sabotage" the other and ruin this relationship by cancelling contracts prematurely. Ezra also has the reputation of being a premier vessel provider in South-East Asia, and is one of the few Asian companies owning such assets in the region.

Question: STP who? Does anyone of you know who owns STP energy - the paymaster for Ezra's 2 drilling rigs on time charter to them (Ezra)? If the insiders in the industry don't know who they are, who knows? Everyone in the industry knows that exploration/drilling stage in oil and gas can make or break a company. Either you find oil and you strike it rich, or you go bust with no oil found. In today's climate, either way STP will be in for a rough ride. At time charter rate of $160k a day per rig, even if they find oil, at today's oil price you can be sure the margins will be low. If they don't find anything, the company can just close shop and pat their backsides and leave. The way Ezra is doing business is really worrying. Their reluctance to reveal more about this project and who the hell STP are is really worrying (to the investors that is).

My Reply: I am not sure where Citigroup got their information on STP Energy and why they chose to use this information to show that Ezra was "less than transparent". From my queries with Management through Ezra's IR, the Company has said that the Citigroup analyst had NOT spoken or met up with Management to discuss STP Energy; in other words the analyst did not clarify his concerns and doubts with Management before writing the report. Apparently, parts of the information were pieced together through fragments of news bits found on the Internet; thus I would NOT rely on the rigour of the analyst's reporting due to this. From what I understand, operating an oil rig costs a lot and the figure mentioned is not surprising. Ezra has reiterated tha the contract is on a "Cost-Plus Basis" which mitigates the downside risk of earnings not materializing. As to whether the client is credit-worthy, I shall have to find out more from the Management at the AGM.

I think I have address most of the concerns brought up by this forumer except for the STP Energy one. I think the questions are rather pertinent and am quite glad to be able to answer them. If anyone else has issues to bring up about the industry or company, please feel free to leave a comment.

51 comments:

donmihaihai said...

Hi,

I have always take quick looks at Ezra results as I am pretty interested in OSV. And there are some questions.

1) Low ROE. I consider Ezra ROE for the last few years very low. That is of course without gain for selling of vessels and interest in subsidiary. Being in the industry with extraordinary demand, I would expect very high ROE with leverage.

2) Low cashflow from operations. It is the same for last few years. It is the same as ROE as with extraordinary demand, pricing power is likely to be in the hand of OSV player like Ezra which mean Cashflow from operations should be higher or at around NPAT even with growth.

3) The business of Ezra is built by 1) selling of vessel, 2) interests in subsidiary and 3) selling shares. With the fuels of 1 and 3 taken out, how Ezra is going to build their business further?

4) Ezra put the reason for changing of reporting currency from SGD to USD but why do it at a time where USD is dropping fast? What is the whole financial statement look like if it is presented in SGD? And I don't like the allowance of doubtful debts in time of high demand --- from whom? Is the provision of foreseeable losses a telling of vessel price peak? If so, the game of selling vessel is over, prepare for the reverse.

5) Not declaring dividend is prudent but buying back shares with coming huge capital requirement is prudent too? I know the benefits of share buyback but is there any other thing the management want with this?

I have not look go through the whole of Ezra in detail so this is what I see on the surface. And while Ezra B/S is more well "fortified", it does not come from normal operations which is where it matter the most.

Anonymous said...

this is my first time seeing young people like you stone head like an old man.. you do have a very wise choice to invest in these company with huge profits... but it is not always a good idea to just keep holding knowing that it will get worsen... you can always come back and buy again... for your case, it's so pity that you can easily reap more than 300% gain , but now all close to -50% loss..

ask yourself a very realistic question, will the market perform well next year? No, it will not, the recessation just started.. and next year will be the bottoming process.. and hopefully a shining day will be seen in year 2010.. and with your so called value holding on these stock is going to crash your portfolio further and further...

you should learn 1 big lesson, you are over confidence.. and yes, you analysis the company with great details, and so what with investment of 20K in one company? you can't even fight with the market trend, be realistic, wake up, and it is probably too late to cut loss..

having said all this, i would definitely, buy Ezra , Swiber and china fish... not now.. but very soon... when STI hit 1700 level, a strong dead cat rebound will happen... according to the history chart... and down all the way to 1800 points again for bottoming process.. good luck..

still can't imagine Ezra now is only 0.48... today might even break 0.40, poor thing

ken said...

Musicwhiz,
I agreed with the statement. I have sold of ezra but will get it back when the market is more stablised..


sometimes, you got to see the situtation.. not u happy and following principle, then u invest..

Just my 2 cents thought..
no hard feeling..

cif5000 said...

Don't worry too much. Looking at the trend, the market should hit rock bottom by Christmas this year. I mean ROCK BOTTOM, where the STI is 0000.00, where all stocks become free, and my pillow becomes the best comfort and asset. The beer that I drink will not earn these sucker shareholders any money, and neither do I have to pay for the mobile phone bills. I take the MRT for free but where to? There is no need to work because there is job around.

Well, a fishing boat is good thing to have when the time comes. I can then go fishing and write a book on "Where to Buy Stocks and a Few Things I Learned about Fishing".

musicwhiz said...

Hi donmihaihai,

Thanks for the questions.

1) I think one reason for the low ROE is because their equity base is growing large due to the exceptional gains from the sale and leaseback. Thus, ROE would not be a totally accurate indicator of the returns per dollar of equity. However, maybe return on assets is a better measure as Ezra is a company which literally charters out its assets for income.

2) Hmm don't totally agree with this one. Operating cash flows are prepared using the indirect method of cash flow statement preparation, thus the final figure is based on working capital movements and not ACTUAL cash received or paid except for interest and taxes. This implies that timing differences, deferred receivables and other accrual accounting concepts may work to distort actual cash inflows during the period. I take it mostly as a guide but realize that this method of cash flow statement preparation has its limitations. That said, as long as they are generating net +ve operating cash inflows, it should bode well for the company. Because of high capex, they currently have negative FCF and this should continue until FY 2011.

3) Don't quite get what you mean by this. Ezra's business does not hinge on those 3 aspects you mentioned. You make it sound as if it's their core business haha ! They have 3 divisions - offshore chartering, marine services and a new energy services division. The former is recurring on long-term contracts while the other 2 divisions are project nature, so revenues can be lumpy. Just FYI, the new vessels coming on stream will also add to their recurring revenue "base".

4) I think you have some misconceptions about Ezra's business. They changed their functional currency because most of their revenues are now derived in USD, not because they HAD to. The allowance of doubtful debts is for smaller customers with higher risk of going bust in the current credit crunch; the bulk of their revenues come from oil majors who are in no danger of going under. The provision for forseeable losses is for the conversion of USD to SGD incurred by the yard; thus resulting in a loss from the sale and leaseback. THis was explained in the company's press release today (Oct 23, 2008).

5) They only bought back shares some time in 2007 and it was just a small chunk. There was no share buy back for the whole 2008 if I remember correctly.

I believe more of their cash will start to flow in once the vessels come on stream. The company is still in expansion mode so their cash always never seems to be "enough".

Regards,
Musicwhiz

musicwhiz said...

Anonymous,

Your comment is totally superfluous, but I will leave it here as a testament of how people such as yourself can talk a whole bunch of stuff and yet not make much sense.

If you wish to post a comment on my blog in future, please at least TRY to be more constructive and less emotional.

Thanks,
Musicwhiz

musicwhiz said...

Hi Ken,

No problem, at least you are honest and polite about it and I wish you all the best.

I am happy being a shareholder and confident of my choices based on the facts and reasoning I provided.

Cheers,
Musicwhiz

musicwhiz said...

Hi cif5000,

No problems I am not worried. Such times are good times for me to accumulate shares in the companies I already own. Too bad I don't have more cash, oh well. :)

Regards,
Musicwhiz

Anonymous said...

One possible reason why Ezra is trading so low could be that they have a financing gap which they may not be able to bridge

musicwhiz said...

Hi Anonymous,

Erm, sounds quite chim actually. What do you mean ? Do you care to elaborate, please, for the benefit of all who read my blog and my comments section ?

Thanks !

Musicwhiz

Anonymous said...

Dear Musicwhiz,

I am disappointed that Ezra did not declare any dividend this year.

While you supported the company's decision that the monies would be better used than returning to the shareholders, I am of the view that there is opportunity cost for our investment monies. The monies retained in the company must generate further growth which will lead to higher share price. However, Ezra's share price dropped to about 40 cents from $3.80 despite its rapid growth.

Similarly, the shareholders of Swiber had received nothing for their investment for the past few years as the company never distributed any dividend at all. In fact, the shareholders suffered losses as the share price is now below 40 cents.

You may argue that your time horizon for investment in these companies is 3-5 years. But what if the share price dropped back to 30-40 cents at the fifth year despite their high growth and still no dividend received.

I am still wondering whether did I make the right decision to invest (about $100,000) in Ezra (25 lots) and Swiber (7 lots) instead of blue chip companies which consistently pay out dividends? These dividends will at least pay for the opportunity cost of my monies.

Regards

ROBERTAY

musicwhiz said...

Hi again ROBERTAY,

You should realize that investing in companies such as Ezra and Swiber means that there will be hardly any returns in terms of dividends as both companies are highly capital intensive and need to build up their asset base in order for cash to start flowing in. Their business model does entail significant risks and I cannot 100% say for sure that they will succeed as a lot depends on how Management steers the company, and also industry conditions and macro-economic factors.

In my opinion, there is no problem with Ezra re-investing the monies to grow the business over the medium term. What you are seeing is Mr. Market pricing the companies using extreme pessimism, as if they were better dead than alive. My advice is not to pay too much heed to Mr. Market and to focus on the business and industry to see if the Company can sail through unscathed.

If after 3-5 years the two companies really grow steadily, and economic conditions are back to normal, I do not see why the Market will not accord them the valuation they deserve. This is assuming you are right and they eventually succeed. The market will eventually reward long-term success, don't worry about it.

The decision to invest should be made by yourself based on your own independent assessment and research. If you had followed someone else's advice, then it is risky as you may not know what you are investing in.

Wishing you all the best for your investments.

Regards,
Musicwhiz

Anonymous said...

hi,

from your posting can tell about your inexperience in investing the market

i agreed to the comments posted by someone 23rd Oct morning...100%...the problem with you is that you are too fundamentally based, and to make money from market you cannot only use this method

analysis is highly subjective, so you said this company good and someone else can say that is bad...so the safest way to invest now is to follow the trend...why do u want to buy now when you know the trend is down? my experience in 1997, 2001 and 2003 had already taught me dont go against the trend...so what if you buy now believeing now is the reasonable price level, the price will still continue to go down and by the time it rebounds, it still cannot reach your earlier level...then you might comfort yourself that you keep it long term, the warren buffet way...but again market has changed, we do not trade in a warren buffet era anymore when there was no internet ...doing so much analysis and still cannot make a single cent will make you feel silly...

you might have made a lot in the past year but in a bull market any method works and any method makes money...the strength of a trader will only be revealed in a bear market

there ought to be an easier way to make money from the market

ezra on its way to 10c

Anonymous said...

you should buy more now instead.

Anonymous said...

wow.. i saw your post at sharejunction, well, i only have 1 thing to say...

wait for most of the blue chip to buy at $1 .... you name it... Sembcorp, Sembmarine, Comfortdelgo, M1... then, reap for huge profit in year 2012..... give them 4 years, take huge dividends of at least 5% each per year... beautiful..

Anonymous said...

Why all these negative, unkind and caustic remarks?

The objective of this blog is to share trading views learn from one another. No one will gain anything from destructive criticism.

GG

PC said...

MW, may I sugguest you ignore ALL those postings on your blog by ppl who don't even have the courtesy to put their initials down! Note: I'm specifically referring to that particular one, who consistently visit your blog; known to readers here as 'anonymous'.

donmihaihai said...

For 1) How sure are you? Have you look at other in the same industry? Some are generating huge ROE even with exceptional gains every year due to sale of vessels. ROE is a accurate indicate OVER TIME. That is what I am talking about. What is EZRA average ROE since listed? What is EZRA ROA with deploy only and with undeploy vessel as well?

For 2) I am talking about OVER TIME. The average for last few years. I know about changes in working capital BUT in time of great demand, the pricing power is at player like EZRA which mean customer will usually try their best to repay and get good term with them which mean operating cashflow should be very strong.

For 3) I will challenge you to put out all retained profit with gain side by side with capital raised/gained and see the diff.

4) I think you have some misconceptions about Ezra's business. They changed their functional currency because most of their revenues are now derived in USD, not because they HAD to.

#Most revenues from these players are in USD. I am actually trying to ask IF they have other motives which is the CORRECT WAY to ask if any company change their way for a/c.

The allowance of doubtful debts is for smaller customers with higher risk of going bust in the current credit crunch; the bulk of their revenues come from oil majors who are in no danger of going under. The provision for forseeable losses is for the conversion of USD to SGD incurred by the yard; thus resulting in a loss from the sale and leaseback. THis was explained in the company's press release today (Oct 23, 2008).

For the sale of vessel, I am asking if the price of vessel had peaked. If so then gain from sale of vessel is no longer in the option anymore... that can be say the same for sale and lease back. And the doubtful debts is on who and why. In time of great demand, it is player like EZRA to choose so can I say they did a bad job of choosing their customers? You know where I am coming from?

5) They only bought back shares some time in 2007 and it was just a small chunk. There was no share buy back for the whole 2008 if I remember correctly.

#Oh maybe I confuse EZRA with Swiber.

I believe more of their cash will start to flow in once the vessels come on stream. The company is still in expansion mode so their cash always never seems to be "enough".

#I do not like to go into "believe", I like to see facts. The facts are not there.

Sgbluechip said...

Hi MW, no worries. I also have jokers making crude remarks on my portfolio. I often ignore and filter them out. ghchua also faces the same issue.

We are often faulted for being candid and open in our investments.

They do not realise that we are only accountable to ourselves for our gains/losses. What/Who gives them the right to reprimand us for making their perspective of bad decisions?

And not to comment that they often say such things with only the benefit of hindsight.

What we are trying to do is to only ink out our thinking process and document our investment journey.

I appeal readers to show more self respect to yourself through your comments. Hiding behind "anonymous" curtain does not mean you are any lesser human being please.

Anonymous said...

I give you a further hint if you think the earlier comment about funding gap is chim.

Basically companies like Ezra are probably short of cash to fund the deliveries of the vessels that they ordered. With current credit conditions, they can hardly raise new debt. With their equity so low, issuing new shares is prohibitively expensive which means that potentially that company could be worth nothing if banks start pulling their loans.

So the market may be more right than you think.

Anonymous said...

Let be rational. If you compare Jaya Holding vs. Ezra and Swiber, i will take Jaya anytime.

regard,
Ryan

Anonymous said...

Hi MW,
I have total respect for you. I have learnt alot from you blog. Ignore what they say and believe in yourself. And even if you end up wrong, you definitely will gain/learn something out from it. So in a way, there is no way you are going to lose.

Jack

Anonymous said...

Dear Musicwhiz

Do you mean that we should not expect any dividend from Ezra and Swiber until they are more established.

If this were the case, I will buy more dividend bearing counters instead. I am still of the view that we have to be compensated for investing via dividends until the shares were sold.

My KeppelCorp ($12.70), Semcorp ($5.40), Cosco ($5), SC Global ($2.50), Creative ($10.50), Parkway ($4.10), ComfortDelgro ($2.10), SPH ($4.50) etc all bought regretably without any margin of safety still gave me good dividends this year. In fact, my seven lots of Keppelcorp gave me about $600 each.

Incidentally, I had just paid off my loan for the previous Ezra (25 lots at $3.36) purchases. DBS just called me up and offered me personal loan at 2.88% pa. I am tempted to use the loan facility again as Keppelcorp is close to its bottom at about $3 plus.

Regards

ROBERTAY

Anonymous said...

Mr tay, u r cool!!!!

MW, the chim statement abt the ability to repay or raise fund can be found here....

http://www.sgdividends.blogspot.com/

the situation now is unprecedented. valuation are just figure given by those analyst... now valuation or price of asset n commodities are falling faster than ever...there is domino effect, snowball effect margin calls again and again, dumping by hegde fund again and again. aig drawing fund from fed again and again... no lquidity, libor spread very wide... the big guns r burnt... when they realised how big the hole then maybe they start buying... now they cant even save themself... US trying to get the rest of the world to bail them? the yen carry trade is killing... Macro view, its just bad... how can most company survive? when AIG also have problem to get funding to bridge their financial gap?

rgds
leeku

Anonymous said...

by the way, i often read your blog and its quite useful... i am a lazy fa follower... so i read info from blogs and verify with others or my own.

also for fa and ta, i also believe in cut loss... tho i not very disciplined at times.

just my 2c, no offense man

happy tradung

leeku

james T said...

MW,

SGDividends commenting on the Ezra debt financing..How true it is? I have ezra previously but cut loss at 0.530 x 5lots. Now tempted to go in but I read sgdividends' comment on http://www.sharejunction.com/sharejunction/listMessage.htm?topicId=404

Looks like i not sure if i should buy back.... perhaps go for other related industry which is better sight.

wat is ur comment on this?

nalabala said...

No hard feelings musicwhiz, but I think the current market is a classic example that exposes many investors like yourself who are too overconfident and often underestimate market risks. There comes a point when you have to accept the fact that something's wrong with your strategy when you go from +500% to -60% in a year.

That's why I always believe in the proper diversification. In bull markets, there's just no way to properly identify company and industrial specific risk no matter how hard a layman try to read annual reports.

99% of the management will not disclose the dire state of the company until the day they suspend trading. It's important to take management's presentations with a pinch of salt.

You say you have a time frame of 3 - 5 years. But look at Ezra, you bought it in 2005 and it's already more than 3 years now and at this juncture you are like -40% down. You chose not to sell it when it reached $3.50 area with +500%. To even get you back to the $3.50 region last year, you need an increase of +880% within 2 years, what are the chances of that happening?

There's only so much theory you can talk before you get slammed with the hard facts. If you argue you are the hold forever guy, maybe there's some room for your strategy, but right now your hold for 3 - 5 year strategy is simply not working.

musicwhiz said...

To all the Anonymous people out there (yeah those who don't bother to even leave a nickname or initials), this is a blanket comment for all of you.

In my blog, I have always maintained that I am new to value investing, and that I started only in late 2006. Before that, I was stumbling around using all sorts of methods which produced lousy results in a BULL market. The fact is a lot of comments here border on trading mentalities, which is NOT what this blog is about, so I am not sure why these people choose to visit and carpet bomb this comments box with their fanciful theories about what one SHOULD have done, or WOULD have done etc. Hindsight investing is very pervasive, need I say more ?

As for macro-economic conditions deteriorating rapidly, I think no one could have seen it coming, much less a retail investor such as myself. Not even Henry Paulson, Ben Bernanke or the famous Alan Greenspan could have seen this tsunami coming; and mind you they are veterans in the market and are experts in economic policy. So how can an ordinary man on the street hope to figure out the ramifications of the credit crisis ? To pass judgement such as this, please look at yourself in the mirror first and honestly ask whether you KNEW it was going to be that bad ? I doubt many people can say "yes" to this 9-12 months ago.

Over-confidence ? This word crops up more often than once. Just because one has faith in the company one has invested in, during bear markets, it has been perceived as "over-confidence". It's a little like analysts changing their recommendations on a whim because of winds of change, and adding in weird stuff like "bear market discount of 15%" to their valuations. As an aspiring value investor, I have never admitted my analysis was superb or good; I just do my best. If global events happen to catch me by surprise, then so be it. This is what MARGIN OF SAFETY is for - so that one does not lose to much money if one turns out to be wrong. Purchasing companies at decent valuations means there is a chance the company can continue to churn out profits and grow after the economic crisis is over. I would much prefer this to either i) buying at 30x PER during the bull market or ii) buying loss-making, speculative companies with no sustainable business model. One can argue that Ezra's business model is flawed, but time has yet to pass and people are already passing judgement ! And all simply based on Mr. Market's moods, which I find highly entertaining.

I have also noticed that bear markets tend to bring out the WORST in people. People love to gloat, point fingers, accuse, laugh at or be sarcastic. Perhaps this reflects the prevailing sentiment out there and the despair and hopelessness people feel. If your time horizon is 3-5 years, most companies (not all) will survive and be able to continue growing.

Regards,
Musicwhiz

musicwhiz said...

Hi PC,

Thanks, good idea ! Your advice is much appreciated.

Take Care,
Musicwhiz

musicwhiz said...

Hi donmihaihai,

I have respect for you as an investor but in your most recent comment you seem to come on a little strong. I am requesting politely for you to temper your tone; this is after all a discussion.

1) ROE for the company for FY 2007 is about 11.8%, while for FY 2008 it was about 13.1%. As mentioned, the exceptional gains have made their equity base balloon over and above what it would normally be had they just retained recurring profits year after year. This would put ROE in the low teens for the last few years.

2) I don't agree with the fact that Ezra should have pricing power. Market rates determine the charter income that Ezra gets and I don't think they can negotiate rates 10-20% higher than industry unless they had some special advantage. And payments for charters are regular except for new charters where the payment structure may differ, so I am surprised when you say that this plays a part in customer hastening their payments; therefore operating cash flows should be higher.

3) Not sure what you are asking me to do, but please don't make it sound like a challenge. This is just a discussion so both of us can learn.

4) Maybe your phrasing is a little funny, but I don't understand what you mean by "CORRECT WAY" of asking. You mean there is a wrong way ? That is the reason given. Period.

5) Actually, I don't know where you are coming from and am unsure what you are trying to ask. Why the focus on "sale of vessels" ? I've said time and again that Ezra's core business is NOT in the sale of vessels for gains. It is stable charter revenues and project-based assignments for fabrication and construction. Their customers consist of oil majors and smaller oil companies. They have provided for doubtful debts because of the risk of the smaller players going bust.

What facts would you like to see ?Their vessels are coming on-stream from FY 2009 to FY 2011, so the cash will come in once each vessel is chartered out, subject to on-time delivery of each vessel. Just wait for time to pass and don't be too hasty to pass judgement just because of the current turbulence in the global economy.

Thanks,
Musicwhiz

musicwhiz said...

Hi SGBluechip,

Thanks for visiting and sharing your thoughts. I also believe most people comment here with hindsight investing mentality. The classic "I told you so" when they themselves don't examine their own strategies or whether their own conviction had worked for them.

As you say, hiding behind "anonymous" allows one to say more or less anything he pleases.

Regards,
Musicwhiz

musicwhiz said...

Hi Jack,

Nice of you to drop in. Yes, I believe I will learn valuable lessons from this experience, even if some of my investments don't turn out well 5 years down the road. Mistakes are to be learnt from, not shunned and feared. Experience will make one wiser.

Cheers,
Musicwhiz

musicwhiz said...

Hi ROBERTAY,

Yes, you should not expect dividends from the two companies as they need cash to scale up their vessel fleet. Essentially, they are in the "growth" phase and will only hit "maturity" many years from now.

And please, my advice is not to borrow more money to invest in the market. This is NOT a good time to incur more debts as a global recession is coming.

Regards,
Musicwhiz

musicwhiz said...

Hi Leeku,

Thanks for your comments. The world is topsy-turvy now, that's a fact. The idea is to wait for the storm to subside to see what the situation will be. In the meantime, one should hold on to their investments - why sell into a deep bear market when Mr. Market is horribly manic ?

Thanks,
Musicwhiz

musicwhiz said...

Hi James T,

Don't be too bothered by that blog. They are dragging up a lot of info from the prospectus and using it to bolster their case. The company is very different now compared to the time of IPO so how can you do such a comparison ? It's like comparing apples to oranges.

As for debt financing, Ezra has secured a S$500 million loan facility announced on August 1, 2008. I can't tell you whether you should buy back; all I can say is you should review all the facts on your own and not just listen to myself or a few other blogs. Independent thinking is what I emphasize.

Good luck !

Musicwhiz

musicwhiz said...

Dear nalabala,

No hard feelings too, since you are so polite. But the speed of deterioration in credit markets and the global economy caught everyone by surprise. I don't think it's fair to use "over-confident" and "under-estimate market risk" because even the experts under-estimated everything; much less retail investors like us. We can only see the carnage with the benefit of HINDSIGHT.

So a strategy is wrong just because the market price collapses 80-90% within a year ? So what happened to the belief that price and value are not correlated ? I guess it must be a forgotten concept during such bearish times....

I agree no company will admit they are going under soon, but one can get an idea from their financial statements. Risks are of course higher for companies with high gearing, I do admit. But ultimately we have to trust in our choices and the quality of Management. They also have a significant stake in the company (usually at least 20% or more) and would NOT want to see it fail, right ?

When I purchased Ezra, it was with a view to hold it till at least FY 2012 when all its MSFVs come on-stream. The original intention is already for long-term, so why bother about hindsight and about selling at $XXX and then buying back at $XXX ? Purely academic. Most stocks give returns of about 6-8% per annum including dividends over the long-term. I apply margin of safety to my purchases so that I protect my capial; short-term price fluctuations do not bother me too much.

Last point to note: how can a 3-5 year buy and hold strategy "not work" when 3-5 years has yet to pass from this point ? Note that the global credit crisis has erupted at this point in time which is depressing valuations of ALL companies including blue chips like SingTel, DBS, UOB and Keppel Corp. So you are saying that a person holding the blue chips 3-5 years ago is also "wrong" because they did not make a profit after all that holding ? Have a longer-term investing horizon than just 3-5 years. Some companies take many more years to build themselves up; the patient investor will reap long-term rewards.

Regards,
Musicwhiz

Anonymous said...

The MTN facility is not something that is underwritten or committed. It is issued on an ad hoc basis depending on the credit conditions. So in this current market, the company may not be able to get any takers for its notes.

Do your homework properly and reassess the risks!

musicwhiz said...

Anonymous,

Can't you at least be polite and leave your name ? The tone of the comment is, as usual, vindictive. I just wonder if there can more polite people out there ?

It is up to the arranger (UOB) to assist Ezra to look for potential note holders, and to market the notes. It is very premature to pass a blanket statement about there being no takers just because of the credit conditions.

Please do your homework too and be aware that not all companies are affected the same way in a credit crunch !

Regards,
Musicwhiz

Anonymous said...

yo mw, surely mostly affected but not all in the same way. one thing for sure, the cost of financing will be expensive... which will eat into cash flow crucial to survive this crisis....

cost of biz will be higher when biz is no good... mortgage int will increase when rental no good... its more or less a fact now...

the cut loss point maybe irrelevant now... its all depending on ur appetite n war chest....

hopefully most can pull thru and then vola... the bull will be back.... then we can start the party again... till then, take care


leeku

donmihaihai said...

hi,

Temper my tone?I try lah.. but if you do notice, I am always like that. Never change. And the last thing I need is respect as an investor which I don't need and deserve.

For 1) Correct. That should be one of the reason for low ROE. But in time of GREAT DEMAND, it is not uncommon for company to earn 2X or 3X more. So the question mark is there and I seriously think that it is due to sale and lease back.

For 2. That is not what I am trying to say. I mean in time of GREAT DEMAND, company/people having the assets that are in demand will has bargaining power(or pricing power)which will cause their cashflow to be very good. One recent example is raw materials, almost every manufacturing company is paying or paying in advance which cause their working capital to change. Another example is OSV where their liabilities increase because their customers are paying in advance.

For 3 & 5. What I am saying is what is happening to EZRA is most of their capital is not from normal course of operation but rather "trading" or whatever you want to call it. Of course I hope that you put that out to prove me wrong because I din go and add them up.

For 4)Maybe there is no correct way but isn't it time to think when it happened? I mean why accept all reasons given by company? It is not a prudent thing to do too.

I think it is my fault as I never stated clearly earlier that I see EZRA as a company in an industry with great demand. For these company, I like to see margin expansion, increasing ROE and very strong cashflow. It may not the case for any single year but on average over a number of years, it must be there and OSV has been surging blooming for last 5 years or so.

musicwhiz said...

HI Leeku,

I agree with your views. Such measures are definitely higher risk in such an economic climate, compared to 2-3 years ago during the boom. I admit I should have prepared myself for this but I did not; so maybe in time I can blog about it as one of my investment mistakes, which I shall readily accept and learn from.

Thanks,
Musicwhiz

musicwhiz said...

Hi Donmihaihai,

No la, I respect all investors if they come from a clear base of thinking and if they ask sharp questions. From your blog, I can tell that you do think through a lot of issues and are a careful investor; though of course one cannot have enough margin of safety in such tough times. To me you appear candid and somewhat unrestrained, but I know your intentions are good. :)

1) You are right, the sale and leaseback is what generated exceptional gains and increased the equity base. I am not sure if you can safely conclude that ROE should have been higher - are you comparing with other firms in the same industry ?

2) For Ezra, their business model works in a different way in that their customers do not pay in advance, but only when the charter commences. Even though they seem to have expanded aggressively, in reality they only take delivery of 1-3 vessels per year from FY 2008 onwards and thus their operating cash flows should increase steadily rather than having a large jump.

3) Most of the capital is generating through operating cash inflows, sale and leaseback and also sale of part of EOC (51.1% to be exact). Yes you can definitely question their capital-raising methods which are risky and unconventional; but luckily it served them well in the past. Though of course they will find it almost impossible to tap the equity and debt markets for fresh funds now and probably in the next 6-9 months.

4) Well, let's just leave it at that. Maybe I am not so imaginative and thus cannot think of other reasons for the change in functional currency.

Your point is valid, but I see Ezra as more of a steady grower in terms of ROE and bottom line (take away all exceptionals and recurring profit is growing steadily, not by leaps and bounds). The company is also slowly expanding into other areas like their Vietnam yard and Energy Services.

As I said in my latest blog post, even if I were to lose all monies on Ezra, I will take it as a lesson learnt and mistake recognized. It will not adversely affect my financial position and I am prepared for such an eventuality should it arrive.

Thanks,
Musicwhiz

donmihaihai said...

Hi,

I does not deserve any respect as an investor because I have nothing to show. NO RESULT.

Anyway I have only one question left which is with all capital expenditure coming in the next couple of years, can EZRA fund them with internal cashflow and debts? If not then the real headaches will start and I thinks they will start with many diff ways to get that capital which can include playing their acc to the border too.....

For ROE is sale and lease back.
1) Yes comparing with other firms in the same industry.
2) I spoke with an executive of a local listed OSV about sale and lease back. He called them norwayian dentist which demand 15% return for these kind of business.

I din verify the 15% but it should be pretty much there as that is the kind of return many funds and company are looking for.

Now, if a company do a sale and lease back, the return(return on equity)will need to share by 2 parties rather than one. If an OSV company can earns 30% ROE at current time with reasonable leverage, then 15% will go to those "norwayian dentist" while another 15% will go to the OSV. As simple as that, sale and lease back can fuel grow but improve ROE is another story.

Just like sub-prime, one can't change the whole thing by packaging them. Worse still, don't forget there are always some causes that can hurt them when time change. The earlier sale and lease back should be ok but the later ones done when the cycle is peaking are the dangerous one.

Anonymous said...

yes, bought 20 lots of Ezra at $0.34... hopefully, I will swim through the current.. cheers.

goodstuff said...

my next stratergy is to buy most of the musicwhiz portfolio at dirt cheap price, heee.. since he is doing such a deep analysis, i will next Suntect Reit, Swiber, ChinaFishery and TatHong... but not Boustead, Pacific andes and First Ship Lease Trust. the price now, I can get 50% cheaper , by the time, I reap 100% gain, you just average out, heee..

let's see... thanks for the sharing dude.

musicwhiz said...

Hi donmihaihai,

Regardless of whether you have results or not, it's the analytical skill I admire. I don't admire WB because of wealth, in fact it's his character which I find refreshing and his humility.

According to the Company, they are able to use a mixture of internal CF and debt to fund their MFSV and expansion of their yard. I certainly hope they did their sums right, it would be tough to raise capital through debt in such a credit crunch; and equity is simply out of the question.

I agree, each party would want some "return" on the transaction. A S&L is not good for ROE but is used more for cash flow purpose and to expand "off Balance-Sheet". I guess there are merits and demerits to using such a method.

I concur that you can't change the packaging - I've always stripped out Ezra's exceptional gains from S&L when computing their REAL growth. It's been steady (not explosive) and that makes me comfortable.

Cheers,
Musicwhiz

donmihaihai said...

Hi,

Have you read CH Offshore 1Q2009 results? That is what I am talking about. extraordinary.

I do not believe they are being called "norwayian dentist" for no reason. rather than guessing on the merits and demerits, try re-read(or read) Warren Buffett chairman's letters
2007 for "The great, the good and the gruesome" on ROE and business part &
2005 for "How to minimise investment return" which fit prefectly well on part of the sale and lease back.

Anonymous said...

i might hit jackpot with my 20 lots Ezra at 0.34, LOL..... thanks dude

Anonymous said...

ha ha... 0.59 today, that's 74.5% gain of my 20 lots just last week purchase, nett PAPER gain is SGD 5K, ha ha... thanks for this good recommendation, LOL... going to sell when it reach 70 cents. let's see..

Mr Tan said...

HI MW,

I'm very new to investing and I've been following your blog as well as others religiously through these tumultuous times.

I would like to seek your opinion on whether if now given the chance just before/slightly after the market slid, would you rather cut your losses and tide out the gloomy financial period?

Because since your time horizon is quite long, and it can be basically simplified into a simple buy-and-hold strategy, it doesn't seem like a good choice to hold on to them in such gloomy economic weather.

It is just my opinion and i would like to thank you for your time to post your discussions and analysis on your blog, and also hear about your views and share your strategies.

thanks.

musicwhiz said...

Hi Mr. Tan,

No, I will not cut my losses and sell to a manic Mr. Market. Other people can think what they want about the companies I own, but I do have my own quiet confidence that their business can perform well in the next couple of years.

In fact, as of this date (Nov 9, 2008), I have purchase additional stakes in Ezra, Swiber, Boustead, China Fishery and Tat Hong. I see opportunities when Mr. Market is manic and severely under-values businesses.

Cheers,
Musicwhiz