Ezra - 1Q FY 2008 Financial Review and Analysis (Part 2)

Dear readers, I shall continue with Part 2 of my review and analysis. Please do note, however, that all opinions regarding valuation are subjective; while my write-up on future prospects and strategies are based on objective verifiable evidence in either the company's Annual Report, or through discussions with Management during the recent AGM as well as through IR contacts using email.

Cash Flow Statement Analysis

Cash flows from operating activities dipped to S$12.3 million for Nov 2007 as compared to Nov 2006's S$16.2 million. This is even though the net profit from core operations increased by 270% to S$16.6 million, up from only S$6.15 million a year back. The main attributable causes are because of the increase in inventories which come with increased vessels, thereby reducing cash by S$9.3 million. This was balanced off by an increased receivable from an associated company of S$13.1 million (net). Trade payables had also decreased for the 3 months ended Nov 30, 2007, resulting in a cash outflow of S$6.2 million as compared to a year ago when there was a cash inflow of S$5.9 million from an increase in trade payables. This is an area of note as it could mean that creditors are reducing their payment terms to Ezra; or it could simply be that Ezra is paying off creditors faster due to higher availability of cash resources. Interest paid also increased about 2.4 times from S$1.4 million to S$3.3 million as a result of more bank loans being taken up to finance their fleet expansion. Interest income corresponding rose as a result of them placing more of their cash in short-term deposits, while taxes paid rose because of taxes incurred in other jurisdictions which are not exempted under Section 13A of the Singapore Income Tax Act.

Cash flows from investing activities recorded a net cash inflow of S$106.8 million, and this was mainly due to the proceeds from the disposal of interest in EOC of S$200.1 million. Purchase of fixed assets took up a significant chunk of cash at S$87.9 million, and the Group also spent S$4 million investing in a joint venture company.

Financing activities saw the purchase and sale of treasury shares, which, when net off, did not give rise to much cash inflow or outflow. There was significant repayment of bills payable while loans taken from banks dropped to S$8.2 million from S$28.2 million a year ago, as it reflects Ezra's cash rich position.

Overall, there was an increase of S$118.2 million in cash and bank balances, mainly boosted by the proceeds from the listing of EOC Limited on Oslo Bors. I will be watching Ezra's cash flow from operating activities in 2Q FY 2008 (1H FY 2008) to see if it continues to be healthy.

Future Prospects and Outlook

For Ezra, they are still on an expansion mode though the scale of it is not as grand as when they were first listed in 2003 and when they won their first maiden FPSO contract in Oct 2006. Below are a list of growth catalysts for Ezra Group in the near-term:-

1) Delivery of FPSO in July 2008 - This will dramatically increase earnings going forward into FY 2009 for the Group, but it will be recognized as a 48.9% stake through EOC Limited as this asset will be held by EOC directly.

2) Development of new yard at Vung Tau - This is currently a greenfield and we can expect updates from Management on the progress of the development of this future shipyard for Ezra's ship-building, maintenance and ship repair services. This new yard is expected to reduce reliance on third-party ship repairers and hence enhance net margins.

3) Completion of Saigon Shipyard and Fabrication Contracts - Saigon Shipyard is due for completion in FY 2008 and will be fully operational by the end of the financial year. This means that it will have the capacity to take on more fabrication projects in order to boost earnings, and this is a separate growth driver for the Group.

4) Aberdeen Office - The setting up of this office is positive as it allows Ezra to seek opportunities in other markets like Africa, North America and Middle East.

5) Staff Incentive Scheme - Details of this are expected to emerge in the coming months, and Ezra needs to retain its talent pool and attract new talent in order to significantly bolster their staff strength in anticipation for their expanded fleet. Such specialized vessels require intensive training and skilled labour and S$19.1 million was set aside for this purpose of recruiting and retaining talent. Although this will increase staff costs in the long-term, it is a necessary evil due to the severe shortage of skilled personnel for the O&G industry. Ezra also have plans to set up a training school in HCMC, Vietnam in order to train the new personnel.

With the above catalysts, there is much to look forward to for the company in the next 2-3 years. I will be providing more updates whenever the company releases any news, and I will be doing an EOC review of 1Q FY 2008 results probably next week or so.

Additional Purchase of First Ship Lease Trust

Today, I increased my stake in FSL Trust at an attractive price of S$1.06 per share, as this implies a dividend yield of about 13.3% based on exchange rate of 1.44 per USD, and assuming there is no increase in the current DPU of 2.42 US cents per unit. My average cost is now S$1.133 and I will be holding this with a long-term focus to achieve good yield.

I will be writing a short review on FSL Trust in the coming days in order to assess the trust's latest results and prospects moving forward.