Ezion 2014Q1 Report - May 2014

Summary of the Company Result

INCOME STATEMENT REVIEW

The Group's revenue for the three months ended 31 March 2014 ("1Q14") increased by US$39.6 million (72.3%) to US$94.4 million as compared to the corresponding three months ended 31 March 2013 ("1Q13"). The increase in revenue was mainly due to the chartering contribution from the deployment of additional units of the Group's Service Rigs.

The cost of sales and servicing for 1Q14 increased by US$16.9 million (56.1%) to US$47.1 million as compared to 1Q13. The increase in cost of sales and servicing was due to the increased business activities.

As a result of the above, the Group's gross profit for 1Q14 improved by US$22.7 million (92.2%) to US$47.3 million as compared to 1Q13.

The higher administrative expenses and other operating expenses in 1Q14 corresponded to the increased business activities as well as increase in the staff strength.

The increase in finance costs in 1Q14 was due mainly to additional interest expense for the funding of newly acquired and delivered Service Rigs.

The lower share of associates and jointly controlled entities' results in 1Q14 as compared to 1Q13 were mainly due to acquisition of the remaining issued share capital of a jointly controlled entity and becoming a fully owned subsidiary of the Group, which is consolidated.

Despite the above, the profit after tax in 1Q14 decreased by US$0.9 million (2%) as compared to 1Q 2013 due to the one-off gain from disposal of a jointly controlled entity recognised in 1Q13. Excluding the gain from the disposal, the profit after tax in 1Q14 increased by US$17.4 million (62%).

Charter income derived from Singapore flagged vessels are exempted from tax under Section 13A of the Income Tax Act of Singapore. Current period income tax expense of US$0.4 million relates to the corporate tax expense and withholding tax expense incurred by vessels operating in certain overseas waters.


STATEMENT OF FINANCIAL POSITION REVIEW

Non-current Assets

The Group’s Non-current Assets amounted to US$1,835.6 million as at 31 March 2014. The increase in Noncurrent Assets was mainly due to the acquisition and refurbishment for the Group's Service Rigs. The decrease in Joint Ventures was attributable to the acquisition of the remaining issued share capital of a jointly controlled entity and becoming a fully owned subsidiary of the Group and repayments of loans provided to the jointly controlled entities during the financial period ended 31 March 2014

The Group’s Current Assets amounted to US$459.2 million as at 31 March 2014. The increase was due to an increase in Trade Receivables from the deployment of additional units of the Group's Jack-up Rigs, Cash and Bank balances as a result of the cash flow generated from operations and proceeds from issuance of notes.

Included in the Other Current Assets were the advance payments and deposits made for the construction of vessels and Service Rigs.

The Group’s total liabilities amounted to US$1,417.2 million as at 31 March 2014. The increase in non current financial liabilities was due mainly to the issuance of notes and additional drawdown of bank borrowings to finance the progress construction, acquisition, conversion and refurbishment of the Group's Service Rigs.

Included in other payables were the advance payments and performance deposits received.

The increase in total equity was attributable mainly to the profit derived in the period and issuance of new ordinary shares and redeemable exchangeable preference shares.


STATEMENT OF CASH FLOWS REVIEW
The Group’s net cash inflow from operating activities was US$26.7 million. This was mainly due to the net cash generated by the operations of the Group.

The Group’s net cash used in investing activities was US$82.1 million. This was mainly due to the progress payments made and the deployment of funds towards the purchase and refurbishment of the Group's Service Rigs. The net cash used in investing activities was partially offset by proceeds from repayments of loans to joint ventures.

The Group’s net cash inflow from financing activities was US$72.6 million. This was mainly due to the increase in bank borrowings to finance the Group's Service Rigs as well as the issuance notes

Company Outlook

The management is witnessing increased focus on platform and well related work by the oil majors in Asia Pacific, Middle East and West Africa. As a result of this concentration, the Group will continue to focus on investment in Service Rigs to meet the strong demand. The Group will also explore new ways to restructure its Port and Marine Base business to enable it to concentrate on its current key business activities. Ezion expects more assets to be deployed in 2014. The Group also anticipates to taking on new additional Service Rigs projects in the financial year ending 31 December 2014.


My Opinion

Estimated annualized EPS after the recent 100M shares placement offered to Tan Sri Quek could be at around 13.5UScents and annualized EPS could be in the range of 13X, which to me is considered as in reasonable range. As long as the company could maintain the EPS CAGR of more than 13% for next few years, it is considered as cheap counter to me.

The management last time mentioned that the group does not see the need for another round of equity funding until end of this year, which I think is a good news. As current net cash flow from operating still unable to support the current (and future) investing cash flows, I believe that the management may think of another better way (e.g. restructure or park the marine division business into another entity to reduce the overall gearing ratio) to enhance shareholder value in long term.

Let's see if the group could clinch more service rig projects at the mean time to manage its corporate finance to the optimal level. I still think that Ezion is good to hold at current price level.


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