Ezra - EOC Clinches Contract Worth US$148 Million

This evening, on November 28, 2007, Ezra announced that its 48.9%-owned associated company, EOC Limited, had clinched a milestone first major regional contract worth US$148 million to jointly provide transportation and installation services for the Malaysian-Thailand Joint Development Area (MTJDA). The contract was awarded by Carigali-PTTEPI Operating Co. Sdn Bhd (CPOC), which is a joint operating company between PTTEP International Limited and Petronas Carigali (JDA) Sdn Bhd. Thus, the contract value will be jointly shared between EOC and CPOC, which means EOC will recognize US$74 million from it.

This contract will involve the provision of various offshore support vessels including Lewek Champion (heavy lift accommodation pipe-lay barge) in order to transport and install platforms. Actually, it is EOC's 100% owned subsidiary, EMAS Offshore and Construction, which had won the contract from CPOC and CPOC is acting as the main contractor; thus EMAS is the sub-contractor for this project. The project is slated to being in 3Q 2008 (from July to Sep 2008) and end a year later (i.e. around July to Sep 2009), thus impacting the financials for FY 2009.

A quick computation shows that the profits accruing back to Ezra Group are not that significant after all, due to the fact that they now own only 48.9% of EOC Limited (and thus can only recognize that portion of profits attributable to associated company). EOC will recognize US$74 million from the contract over a period of about 12 months, but since Ezra holds 48.9% of EOC, this means that only US$36.2 million of the contract will be recognized in the Group's books. Assuming a net profit margin of 15% (to be conservative), this works out to be about US$5.43 milliion or S$7.87 million; which will appear as part of "Share of Profits of Associated Company" in Ezra's consolidated accounts. Profit attributable to shareholders ex-gains for FY 2007 was S$34.5 million (from my earlier analysis), thus this contract does represent about 22.8% of the recurring earnings for Ezra. It remains to be seen if the Group can scale up their core net profits for FY 2008 significantly, with the delivery of the FPSO Kitty Knutsen. We shall find out on January 9, 2008 when the 1Q FY 2008 results are released.

Regarding the prospects of the Group now that this contract has been clinched, I would say that Ezra also wishes to cover their home base of Asia instead of merely looking for contracts in other parts of the world, which is a good thing. But if the vessels are utilized for such contracts in Asia, will this mean that they will not be available for charter to other parties during the whole FY 2009 ? Will this negatively impact financials and "tie up" their capacity ? For FY 2009, there should be more new vessels coming in to ease this lack of supply, and Ezra should see more contracts coming in as they had ordered the vessels based on customer demand in the first place. It will be good to enquire this of the Management during the upcoming AGM, which should be held in the later part of December 2007.