Share Price S$0.955
Target Price S$1.07
3QFY13: Subsea Services Post A Loss, Instead Of A Rebound
3QFY13 results were below expectations. Excluding other operating income of US$63.5m, Ezra would have posted a loss of US$56.3m due to subsea services losses. Two consecutive quarters of poor subsea services performance suggest execution risks. Subsea gross margin was already weak at about 9% in 2QFY13 vs 15% in 1QFY13, and now a loss in 3QFY13. Downgrade to HOLD with a lower target price of S$1.07.
• A net loss for 3QFY13, if other operating income is excluded. 3QFY13 results were a major disappointment. Excluding other operating income of US$63.5m (substantially due to a gain from the disposal of Ezion shares at end-July), Ezra would have posted a net loss of US$56.3m.
• Gross profit margin collapsed. 3QFY13’s gross margin collapsed to 0.7% (-16.0ppt) from 16.7% a year ago. There were multiple cost pressures. Administrative costs leaped to US$44.1m (+30% yoy) in 3QFY13 from US$37.1m in 2QFY13 and US34.0m in 3QFY12. Interest expense was also higher at US$12.2m (+23% yoy) in 3QFY13 compared with US$10.5m in 2QFY13 and US$9.9m in 2QFY12. These cost increases were offset by better associates’ and JVs’ earnings. Associated companies contributed US$4.2m vs a loss of US$0.3m a year ago due to better performance posted by associate EOC.
• Subsea services segment posted a loss. Instead of a rebound from 2QFY13’s estimated low gross margin of 9% (1QFY13: 15%), the subsea services segment posted a loss because of a) delays in the execution of certain projects (at clients’ request) and b) the recognition of additional costs that were previously unexpected for certain projects. We understand from management one of these is a legacy project, secured prior to the acquisition of Emas AMC.
• Execution risk is now a key risk, despite good subsea contract wins. Subsea order wins have been robust. Emas AMC has won an aggregate of approximately US$1.4b new contracts for the current financial year to date. The new deepwater pipelay vessel Lewek Constellation announced its maiden contract for a US$120m project offshore West Africa in 2014. Despite Emas AMC’s strong contract wins, the poor margins in the subsea services segment in the last two quarters have raised concerns over project execution.
• Share price is in doldrums as Ezra has disappointed again. While Ezra’s current P/B of 0.77x – half of its long-term P/B mean of 1.75x – is undemanding, share price will continue to languish due a) investors’ disenchantment with another set of disappointing quarterly results and b) the subsea services segment – previously viewed as the major future earnings growth driver – is now clouded by execution risks following two quarters of poor performance.
• But risk of a thin net margin. The key risk is Ezra’s thin net profit margin (3QFY13 gross profit margin: 0.7%). Net profit is highly vulnerable to cost upsets. On the flipside, net profit is highly leveraged to turnover improvement if costs can be contained.
• We lower our core FY13, FY14 and FY15 net profit forecasts by 59%, 56% and 40% respectively to US$53m, US$40m and US$80m respectively on lower margins for the subsea services and offshore support services segments. We now project subsea services gross margin at 8%, 12% and 15% for FY13, FY14 and FY15 respectively, down from 13.5%, 16% and 17.5% previously.
• Downgrade to HOLD. We cut our target price from S$1.46 to S$1.07. We now value Ezra at 0.75x FY14F P/B. This is -1SD below its long-term mean of 1.75x. Entry price is S$0.86 or below.
Share Price Catalyst
• Subsea contract wins and margins.
Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 15/07/13