SHARES OF EZRA Holdings haven’t fared too well since the company acquired Norwegian subsea specialist Aker Marine Contractors (AMC) last year. Concerned over the offshore support provider’s limited subsea fleet and teething problems in integrating AMC, investors had been paring their stakes in Ezra. Although the stock rebounded from its 52-week low of $1.31 last month, it slumped again this week on weak results, with the stock falling 11.4% on Friday (Jul 15) to close at $1.315.
For the nine months to May 31, 2011, Ezra says earnings tumble 50% yoy to US$27.7 million ($33.8 million) due to high integration costs of AMC as well as poor project execution. During the March to May quarter, AMC suffered a loss of close to US$10 million, with two of its subsea vessels just 50% utilised. Meanwhile, Ezra’s revenues hit US$339.6 million during the period, up 39% y-o-y buoyed by contributions from its offshore construction business.
For the nine months to May 31, 2011, Ezra says earnings tumble 50% yoy to US$27.7 million ($33.8 million) due to high integration costs of AMC as well as poor project execution. During the March to May quarter, AMC suffered a loss of close to US$10 million, with two of its subsea vessels just 50% utilised. Meanwhile, Ezra’s revenues hit US$339.6 million during the period, up 39% y-o-y buoyed by contributions from its offshore construction business.
Although analysts who cover the stock have slashed their earnings forecasts for Ezra due to the weaker-than-expected 3Q2011 results, many believe the worst is over as the company appears to be securing more subsea work to boost its future earnings. On July 14, Ezra announced that it had locked in contracts to perform subsea work in Indonesia, Papua New Guinea, Russia and Western Australia worth US$85 million for the next six months. The company expects to realise better utilisation of its subsea fleet and is also expecting to take delivery of two more subsea vessels which will immediately be deployed for work in areas such as the Mediterranean Sea and the North Sea by early next year.
“[Our subsea order book] is set to expand further as the subsea construction sector grows in response to depleting shallow fields and increased energy demands from nations such as China and India,” Ezra managing director Lionel Lee said in a statement. “With AMC, we will be in a strong position to further extend our reach in the deepwater development and production sector, which is growing sharply, especially in the Asia-Pacific region.”
The contracts will grow Ezra’s subsea order book to about US$361 million, according to DMG & Partners’ Jason Saw, who believes “the current win-rate implies that the company is on track to meet its target of US$1 billion in subsea orders by March 2012”. “Given the high number of subsea tenders in the market and limited number of competitors, we believe Ezra will win its share of subsea jobs,” Saw writes a July 15 report. “We expect [Ezra’s] subsea unit to be the main driver of earnings growth as the order book is building up and fleet utilisation should head above 70%.”
However, Kay Lim of DnB Nor, who has been the most bearish of all the analysts covering Ezra for the past year, warns it could be another year at least before Ezra’s breaks even in its subsea business. “We continue to expect weakness in the deepwater subsea services segment due to the high fixed costs associated with overheads and vessel operating expenses,” he writes in his report. “The successful integration of AMC, good execution of the current subsea backlog and contract wins are vital to raising investor confidence in the shares.” Lim has raised his new order estimates for FY2012 to US$450 million from US$350 million before to account for the higher level of tendering activities in the market.
Meanwhile, investors can look forward to higher contributions from EOC -- Ezra’s 47%-owned Oslo-listed offshore construction associate. EOC recently reported earnings amounting to US$11.1 million for the nine months to May 31, 2011, down 17% y-o-y, on the back of a 40% rise in revenues to US$113.8 million over the same period. The higher revenue was due to contributions from installing offshore platforms in the Gulf of Thailand as well as from its first floating, production, storage and offloading vessel (FPSO). EOC is also seeking a secondary listing on an Asian stock exchange to expand and diversify its access to new capital markets.
Currently, only three out of the seven analysts who released reports on the stock tracked by Bloomberg are recommending buys and one -- Lim Siew Khee of CIMB -- is calling an outperform. Lim of CIMB points out that Ezra is still 40% cheaper than its Malaysian peers at 10.7 times future earnings and values the stock at $1.80. At the other end, Lim of DnB Nor, who is the most bearish, is maintaining his hold call and target valuation of $1.45 on the stock. Based on Ezra’s current levels and the analysts’ valuations, investors can expect an upside to Ezra of at least 9%.
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