Friday, October 9, 2009

Ezra Holdings - Buy by OCBC (08 Sep 09)

New long-term charter contracts. Ezra recently announced renewal charter contracts for three existing AHTS vessels. These are long-term charters of 5.5 to 6 years each with a combined value of about US$152m. Attractive day rates. We have assumed a blended range for the three AHTS sizes and derive a blended bhp/day of about US$2.10-2.20. This is slightly better than the US$2-2.10 bhp/day charter rates that are built into our earnings model. We also estimate that the rates were more attractive than the previous charters. In view of the optimistic rates garnered, we are assuming that the vessels are large (>8000bhp) and will be deployed in deep water conditions. This authenticates our previous report when our discussions with offshore support vessel players were turning to "encouraging" vs "challenging", especially for the deep water business.

Meeting expectations. We highlighted stabilising charter rates in our previous report. With the recent new charter contracts, it gives confidence to our forecasts as the industry steers out of the bottom. We are also expecting contracts to be announced for Ezion's two liftboats that will be chartered to Ezra within the next 5 months.

Resolution for FPSO Arunothai. We have not heard the FPSO going oncharter yet, a slight delay from our estimates. We originally forecasted that the technical issues would be resolved and for charter to start by end Sep 09. However, the "tuition fees" paid would be highly accretive to the Chim Sao project that EOC is quoted to be in the bidding lead in newswires.

Do not underestimate fleet management business. Ezra manages and operates four new AHTS vessels for an offshore specialist fund in return for a half-share of the profit earned. We iterate that investors should also consider the other prong of benefit to Ezra as it will have 4 new assets with no capital outlay. With the new vessels, we think 3rd party bare boat charters will also be minimised, thereby instilling a defence in its gross margin.

Maintain BUY. We have raised our peg for its core offshore division to 13x FY10F PER (prev. 12x) as we are now more hopeful of better future charter rates while maintaining Ezion (at market cap) and EOC at 6x FY10F PER. EOC has underperformed slightly but can be re-rated if it secures the Chim Sao FPSO at favourable financing terms. Our fair value heads up to S$2.12 (prev. S$2.00).

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