Thursday, May 21, 2009

Ezra - Share Placement of 78 Million New Shares

The announcement of Ezra's share placement caught me by surprise, frankly, for I had thought from their 1H FY 2009 press release that they had already enough cash to fund their MFSV purchases as well as expand their Vietnam Yard. For those who are unaware of the details of the above transaction, Ezra placed out 78 million new shares at a price of S$1.185 per share to raise gross proceeds of S$92.4 million. Considering their issued share capital is now about 580 million shares, this exercise will be pretty dilutive (about 13%) as it enlarges the share capital base to 658 million shares. Suffice to say that as a shareholder, I am unhappy about both the exercise and the rationale. However, I am willing to objectively and rationally analyze the underlying reasons for this corporate action.

With previously announced capital commitments of US$350 million, Ezra had mentioned that they had secured sufficient bank lines and would use internal cash flows to finance their expansion. It was also stated in several analyst reports that growth for Ezra would not be vessel-driven from FY 2011 onwards; instead the Company would re-package its services by combining Energy Servicess Division to provide customers with an all-rounded solution, thus commanding higher customer retention and loyalty and also garnering higher-value (and hopefully higher-margin) contracts.

The rationale for this fund raising exercise was stated as lowering their gearing from 0.5x to about 0.26x as at end-February 2009. One then wonders if Ezra had prudent capital management policies in place to ensure it had sufficient working capital, as raising money during an era of low/depressed valuations (as in this bear market) is usually not a good idea. Perhaps, of course, this exercise had already been on the cards; but news was NOT allowed to leak on the proposed share placement ahead of time, otherwise it may jeopardise the share price and cause a lower placement price to be set. Since the volume-weighted average price is used for the determination of the final placement price, leaking such news beforehand would be tantamount to asking for lower prices; thereby leading the Company to issue even more shares just to raise the required amount.

That said, one must also question if the Group had considered debt financing instead of equity financing and if they had weighed the pros against the cons. Apparently, having a high gearing of 0.5x and a somewhat fragile Balance Sheet meant that getting additional loan commitments (even with standby collateral) would not be easy. The cost of debt is also much higher during these troubled times as we are in the midst of a credit crisis which has yet to fully abate. With more difficulty now in securing needed funds through financial institutions and the higher cost of such capital, Ezra may have then decided to raise monies through capital markets instead; hence the secondary issue. One should also note that in the long-term, such capital is cheaper as Ezra has no obligation to pay dividends on the new shares, unlike debt where there is a clear obligation to pay interest. However, the downside is to the shareholder (including the major shareholders Mr. Lee himself) as they all suffer from shareholding and earnings dilution of 13%. All future dividends must now be divided amongst a much larger pie than before, and the thought rankles.

Incidentally, the previous fund-raising exercise (aside from listing EOC on Oslo) was held during Feb 2007 when they sold 15 million shares at S$5.18. If we take the split adjusted share price, it's like selling 30 million shares at S$2.59. That's about 100% higher than today's placement share price announcement. So they are issuing more than double the number of shares (78 million) at half the price ! Not a very good deal in my opinion, and it may indicate that they are starved of working capital.

Another issue which cropped up in my mind is whether the Management had anticipated such a working capital requirement and whether they had thoroughly planned for such a fund-raising, or was it an off-the-cuff reactionary corporate action predicated by unusual circunstances ? By now, the recession would have swept through most companies and left visibility in tatters. The lack of direction in terms of the future may mean that a Company like Ezra is left to flounder in deep waters (no pun intended) for meaningful direction when it comes to corporate strategy. This has been the case for many players in the oil and gas industry, and it perhaps a probable reason for this fund raising.

Yet another perspective I can offer is that the Group has somehow identified distressed assets or a good M&A opportunity, and are hurriedly raising funds (through Credit Suisse) to take advantage of the situation before the opportunity is lost. Note in the announcement that funding possible M&A takes up a 5-50% allocation, while paying down debt and funding capex takes up 10-50% and 10-70% respectively. This could perhaps hint that there is something out there for the Company to capitalize on, and obviously they cannot make their intentions too apparent through a public press release, otherwise it may alert potential bidders that something may be stirring.

That said, this whole exercise may just be an attempt to lower their gearing and ensure they have sufficient funds for opex and capex without straining their Balance Sheet further. Disclaimer: The scenarios which I have run through above are meant to be discussive, and are in NO WAY insinuating that Mamagement are either inept or are attempting to hide anything. I am also not implying that there is any other intention than the one stated in their press release, but it bears mentioning that a number of plausible scenarios may arise as a result of today's fund-raising which are worthy of contemplation.

So dear reader, please also air your views on how you feel about Ezra's placement, and about share placements in general. Are they "better" than having rights issues (e.g. Keppel Land and Capitaland) ? Is this an indication of poor financial management or a case of being "pre-emptive" and raising capital to take advantage of opportunities which may be lurking ?

3 comments:

PKC said...

Another possibility is Ezra's subsidiary, EOC, had been selected by Premier Oil as the provider of FPSO vessel to their Vietnam oil project. However, EOC can't get the funding for the project because of their high gearing level. Premier had given them a few months to get the necessary fund. Hence through share placement, Ezra has lowered its own gearing level and would be able to be the guarantor for EOC to obtain the necessary fund. Visit below site for more info:

http://www.iii.co.uk/investment/detail?code=cotn%3AOIL.L&display=discussion&action=detail&id=4534766

musicwhiz said...

Hello PKC,

Thanks a lot for the link ! Yes, there might be such a possibility. Let's wait to find out.

Cheers,
Musicwhiz

8percentpa said...

Hi MW

Just to share my 2 cents, any good management will think thrice about asking shareholders for more money. No matter what's the rationale. Rarely is there such a thing as a good rights issue.

And comparing rights issue with a secondary offering (I'm not well-versed in this...), I think rights issue is the greater of the two evil.

Usually rights issue allow the buyer to buy at a great discount to current price - causing a bigger dilution than if capital raising is done via 2nd offering.

To me I think it's just forcing existing shareholders to cough up money, using the discount to entice them to do so.