Ezra - Annual General Meeting News and Updates

I attended Ezra's AGM today at 10:00 a.m. and it was held at Raffles City Convention Centre Function Room "Bras Basah". The turnout was pretty good and there were about 30-40 shareholders. The directors and chairman were also on time except for Mr. Ngo Get Ping (Indepedent Director) who was conspicuously absent from the meeting. The Chairman Mr. Lee Kian Soo mentioned that he would turn up "in a while" but in the end he did not arrive and no further explanation was given.

The meeting proper went as scheduled and all resolutions (including those under special business) were proposed, seconded and passed. I managed to catch up with Mr. Tan Tat Ming and also Mr. Tay Chin Kwang (Finance Director) after the AGM to clarify my questions and discuss the prospects of the Group moving forward. Below is an excerpt of the topics covered:-

1) US$888 million sub-sea installation project - Mr. Tan has confirmed that this project will be under EOCL and thus only 48.9% of revenues will be recognized by the Ezra Group. It is slated to start in 1Q 2008 and Lewek Champion has already begun the intial phase for the project. Note that the value of the project is not US$888 million, but only part of this.

2) Stake in Ezion Holdings Limited - This has been diluted from 21.83% to 18% due toEzion's share placement to raise capital for expansion, and as a result of the 1:2 share split in Ezion's capital, Ezra now owns a total of 10 million shares of Ezion. Ezra is making use of Ezion to charter 2 self-propelled jack-up rigs to augment their well engineering services division. Recall that Ezra previously had joint ventures with KS Energy for oil rigs in 2003 and 2004 (these have since been divested) but are only now taking up the mantle again to expand this area of business. They have the hardware and the software for making this work and currently they also have funds to invest in this area, thus this may become a growth area for Ezra Group in time to come. Mr. Tan was also kind enough to explain the salient aspects of oilfield and well engineering services, and how the equipment needed to be loaded onto the rig in order to be cleaned and how this was part of the extraction process for oil majors. Ezra is, of course, playing a pivotal supporting role in this.

3) Vung Tau Yard - Ezra has leased a piece of land with GFA of 88,726 square metres in Dong Xuyen Industrial Zone in Vung Tau Province, Vietnam. The main function of this future yard is to develop it into a ship building and ship repair yard, so that the Ezra Group can be less reliant on third parties for their shipping repairs and hence reducing costs (and hence improving margins) for the Group. Currently, the piece of land is only a greenfield and Mr. Tay had mentioned that it would take at least a year to year and a half (1.5) to develop it. Construction will commence in 1Q CY 2008.

4) Orders of 4 Multi-Functional Support Vessels (MFSV) - The MFSV, as explained by Mr. Tay, are specialized vessels which are ROV-enabled such that they can operate in difficult deep sea conditions, and Mr. Tan has also mentioned that vessels of higher bhp (e.g. 14,000 and 18,000) have seen very good charter rates and that the industry is sorely lacking in newbuilds for such vessels. All these culminate into better, stronger demand for such vessels and Management is confident of good charter rates moving forward. Recall that Ezra will NOT order a vessel unless there is confirmation of demand from an oil major or a customer, thus the 4 MFSV currently on order are confirmed to be chartered out once they are completed. Financing should take place via financiers or through bank loans and using the funds from the listing of EOC Limited. Mr. Tay said that the Group is watching their cash flows on a weekly basis and I have confidence that they are closely monitoring their cash to avoid sudden cash crunches which may occur should payment be delayed by their customers. Cash Management is integral to any company and I have confidence that the Management can handle this aspect well, as they have done so since 2005.

5) Training Base in Vietnam - Mr. Tan has confirmed that Ezra has plans to set up an in-house training base in Ho Chi Minh City, Vietnam in order to train personnel for sailing and handling of the larger and more complex vessels which are coming on board. Scholarships will also be given out to entice good talent to apply for jobs in the maritime business, and this training base will be used to upgrade and enhance the skills of current technicians and sailors in Ezra's employ. There are also plans for a mentoring system whereby industry veterans will coach the new recruits on how to handle the larger bhp AHTS and MFSV, and personnel from Rolls Royce may also be engaged to give technical updates on the new engines/technical specifications which come with increasingly sophisticated vessel technology. All-in-all, it will be an on-the-job training centre for personnel to be equipped with the right skills set to enable the Company to have sufficient manpower at a time when the industry is facing a growing acute shortage. I see this as a positive move from the company to prevent a skills shortage and also retain talent through appropriate incentives.

6) EOC Award of AIS Status - Mr. Tay has confirmed that Ezra has already been awarded the AIS status some time back, but now it is EOC which was granted the status. This would mean that all income derived from Singapore-flagged vessels operating in overseas waters would be exempted from tax. Furthermore, Mr. Tan had also mentioned that Section 13A of the Singapore Income Tax Act exempts the Group from a certain amount of tax derived from activities of some of their vessels, and my impression is that this award to EOC will further reduce the future tax liabilities of the Ezra Group, as it covers even revenue from the FPSO.

7) Bidding for FPSO Contracts - Ezra is currently bidding for another FPSO deal after they announced their maiden FPSO contract in October 2006. As I understand from Mr. Tay and Mr. Tan, the process to bid for an FPSO contract is long drawn out and tedious as many suppliers of various parts of the FPSO have to be consulted with regards to delivery schedules and parts availability before the contracted can be formally awarded. Even then, there is te question of whether the FPSO can be customized to the customer's specifications. It is good that the Company takes a step by step approach to bidding for the FPSO contract to ensure that all conditions are fulfilled, so as to not rush into it. Such a contract will take up valuable resources and manpower and proper planning has to be undertaken, thus I am sure the Group will not wish to rush headlong into another contract without doing the requisite cash flow planning. I remain cautiously optimistic about Ezra's chances to clinch another FPSO contract, as they are up against industry giants like Prosafe and Solstad.

8) Delivery of FPSO - This has been confirmed to be around June to July 2008 (hence it is the 4Q FY 2008, not 4Q CY 2008). Thus, FY 2008 will see the recognition of about 3 to 4 months of revenue from the chartering of the FPSO.

9) Charter Rates and Demand for Vessels - Charter rates have been on an upward trend and are expected to be sustainble as more oil and gas E&P activities shift to deeper waters. Mr. Tan did mention that India was already drilling to 3,000 metres (which the new vessels will be able to handle) while there was news that a driller in the Middle East had hit 10,000 metres ! Apparently, more oil deposits can be found at such depths than intially anticipated due to the tendency for oil to run to lower and deeper areas (due in part to its viscosity). Thus, shallow oilfields are expected to run dry by about 2030 to 2050, and more E&P will thus shift to deeper waters where more oil deposits are expected to be uncovered. This will bode well for the Group as they have already secured their orders for such vessels which will be delivered in FY 2009 and FY 2010. Moving forward, Mr. Tay did hint that Ezra will continue to order more vessels in time to come, to augment their present fleet. With such buoyant conditions, demand should remain high for such sophisticated vessels and charter rates should remain high.

10) Sale and Leaseback Mechanism - For sale and leaseback, the Group has to sell its vessels to the financier who will then receive monthly regular payments or operating lease payments from Ezra. Ezra will, in turn, charter out the vessel to a customer for charter revenue. Thus, the difference between charter revenue rate (per day) and the per day operating lease requirements forms the basis for gross margin for each vessel (less personnel costs in operating each vessel). Mr. Tan acknowledged that this is the case and assured me that the charter rates are usually about twice the operating lease payments, thus ensuring a very healthy margin. This margin if sustainable because part of the costs and taxes which have to be paid by Ezra in operating the vessels can be passed on to the customers, as is customary in the industry; and oil majors should have no problems in acceding to such requests due to their need for these high-end vessels to support their deep sea E&P activities in future.

The overall feel I got while chatting with Management was that there was still room to go for Ezra's expansion, and they are still in the midst of growth even though they had already shown 5 consistent years of growth. Since most of their larger vessels will only be delivered from FY 2008 onwards, there should still be significan upside to earnings. I will be keeping track of the progress of the company as the months go by, and I am confident that Ezra will continue to pleasantly surprise on its path of growing its revenue and earnings base.