05 December 2014

Ezion - Latest Bond Issue at 7% - Dec 2014

I understood that Ezion issued its latest perpetual bond at 7%, with condition to increase the interest rate 4 years later if it does not recall the bond back at that time. So far it is over subscribed by investors (purely for high net worth individuals or institutional investors), and I believe it will not have any of issuing more "bond like" securities to get more funding. The issue now is whether it will have to pay more borrowing costs during bear market of crude oil as compared to few years back.

The crude oil has dropped from peak of US$110 plus to current US$60 plus, a near 50% drop just in a few months time. The main reason behind is due to the supply glut where there is US shale boom encouraging producers to kept pumping crude oil from US, and OPEC had no choice but to defend their market shares by keeping current production target of 30 million per barrel a day unchanged until next year meeting. In fact, US shale boom is not new to the people in this industry. US is expected to be the biggest exporter of crude oil by next few years if the trend continues.

Nonetheless, as Ezion mainly focus on shallow water area where break even cost is lesser (about US$40 per barrel), so there is a cushion to it to further grow its business in Asia Pacific region. I believe that the expectation of growth rate is reduced at this moment, hence the equity required rate of return becomes higher. If we look at the PE ratio now, it is now about 7 times compared to double digit a few months back.

Ezion recorded 9M14 revenue of US$282M, 42% growth compared to corresponding period last year, with net profit grew 16% to US$140M. It is expected to have more than US$200M net profit this year after including one off disposal gain of offshore marine asset to Ausgroup which is expected to be around US$30M. Cash flow wise, it recorded net operating cash flow of US$139M, with capex of US$344M. The negative free cash flow is mainly due to current expansion stage where it needs to purchase more service rigs for future revenue generation.

With expected PB ratio of about 1.29X and PE ratio of about 6 - 7X and a very good net profit margin (about 50% npm), I believe that it has little room to drop further if current crude oil market could stabilize at US$60 - US$80 range. It would be even a very good purchase if the PB ratio could be below 1.00X. With positive 2 digit CAGR for next few years, I believe that it is considered a good buy at this price level. Please note that it is not suitable for investors looking for dividend income as it provides only 0.1 cents dividend as the management believe that it is better to keep most of the profit for reinvestment.


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