Ezion Holdings - A Positive Conclusion

Following a change in management, AMS has withdrawn its lawsuit against Ezion and released and discharged the latter from all claims alleged. Maintain BUY, with a SGD2.10 TP (106% upside). We believe Maersk Oil may be willing to give AMS’ new management a chance, and the charter agreements will remain in place. The stock has been sold down c.15% since news of the lawsuit broke. Solid progress on the operational front lends further impetus to a re-rating.

■ Giving the relationship another chance

Ezion will continue to engage Atlantic Marine Services (AMS), following the latter’s change in management, to meet Maersk Oil’s exacting operating requirements. With AMS taking responsibility over its team, Maersk may be willing to give the operator a second chance, in our view – and the charter agreements in place may, therefore, continue without interruption. We believe that the withdrawal of the lawsuit is the best possible outcome, bypassing the uncertainties of awaiting a legal judgment and additional complications of operatorship for Ezion.

■ Solid operational progress with three new liftboats working

On the operational front, we understand that three of the four liftboats due in the second quarter have been delivered and are now working. The fourth is still on track. We reiterate the big picture for Ezion – over 60% fleet growth this year to 33 units from 20 units, by Dec 2015, which could drive 18%/45% earnings growth in FY15F/FY16F.

■ USD500m in EBITDA for FY16F may spell a potential dividend hike

With c.USD321m PATMI and c.USD179m of depreciation, Ezion’s EBITDA for FY16F will likely be in the USD0.5bn range. Capex requirements next year are sharply lower, with only four units for delivery. We believe investors should focus on the cash flow – and from this perspective, the stock is compellingly valued at 4.8x FY16F EV/EBITDA and 2.8x P/CF. A meaningful dividend, for the first time, is also not out of the question, given the strength of its cash flow.

■ Still a Top Pick

Ezion remains a conviction Top Pick, offering the highest earnings growth for this beleaguered industry with the highest visibility. Contract wins are key near-term catalysts, and risks remain with units operating in the uncertain environment in Mexico. Maintain BUY, with a SGD2.10 TP based on 10x blended FY15F/FY16F P/E, implying 7.4x FY16F P/E, vs 3.7x FY16F P/E it is trading at today. (Read Report)