Saturday, May 24, 2008

Ezra Holdings Limited (PE < 10)

Extracted From OCBC Investment Research

Review of 2Q08 results. Ezra Holdings Limited (Ezra) reported its 1H08 results recently with topline doubling to S$136.7m with bottomline rising 8-fold to S$207.4m. The unusually strong results were largely boosted by disposals gains on EOC share of S$198m though this was offset by unrealized forex losses of S$12m. Ezra also factored in a one-off provision of S$19m employee benefit scheme to attract and retain talent. Excludingthese one-offs, Ezra reported recurring net profit of S$30.9m.

Recent Petrobras spending spree to drive up AHTS rates. Petrobras has recently earmarked US$112.4b for exploration and production from 2008-2013 with the recent discoveries in the Santos Basin where deep water oil reserves could yield up to 24b barrels. Besides rigs, it heralds a need for about 64 AHTS vessels, 64 platform supply vessels and 18 disaster recovery vessels. This will further accentuate the supply dearth of deepwater capable AHTS in the world and is expected to drive up both vessel costs and chartering rates. As a gauge, an order placed for a state-of-the-art deepwater AHTS today would only yield delivery in 2.5 years.

Production cycle support vessel securitisation. The focus in the last 2 years has recently been on the record order books of rig builders. However, many have overlooked the spotlight on service providers that support the rig operations. With its young and modern fleet of offshore support vessels, Ezra operates in a space that snugly dovetails the offshore oil and gas development upcycle. We think that these oil companies that are in the production phase of the cycle will work to secure support vessels at thepresent charter rates for the next 3-5 years in view of the escalating charter rates. This will translate to stable earnings for Ezra.

Visionary GPS-like positioning. Ezra’s young and modern fleet of AHTS/ AHT are well positioned to tap the production cycle of the industry via 1) upward trending chartering rates, 2) expanding offshore support fleet, and 3) focusing on deepwater offshore support.

Resume with BUY. At the current price level, EZRA is a bargain at 6.8x FY08F PER, vs. strong earnings momentum and sustained charter contracts for its offshore vessels. Using SOTP, we have a fair value estimate of S$4.03 for EZRA. We resume coverage on EZRA with a BUY rating.

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