Ezion Holdings - Wind-Powered Growth

The Dabancheng wind farm in China's Xinjiang province. Photograph: Bob Sacha/Corbis

Ezion announced that it has entered into a strategic cooperation agreement with a Chinese state-owned enterprise to support wind power installation projects in China. This opens up another avenue of growth for the company, whose assets and management skills are wellsuited for wind-farm installation projects. The stock currently trades at 0.4x FY16F P/B, which implies negative long-term growth. Maintain BUY with SGD1.40 TP. Ezion remains a Top Pick in this sector.

■ New market, new opportunities

Ezion has signed a Strategic Cooperation Agreement with a state-owned enterprise (SOE), which is “part of a central enterprise power generation corporation under supervision of the State-owned Assets Supervision and Administration Commission of the State Council of China. The SOE will be responsible for the Engineering, Procurement and Construction of the entire offshore wind power project”. Ezion’s responsibilities include the “loading, construction, transportation and installation aspects of the wind turbine development projects”.

■ Government-driven wind power targets

Demand for wind power is supported by China’s 12th Five Year Plan which targets non-fossil energy to account for 11.4% of total energy consumption. China also targets 5GW of installed offshore wind capacity by 2015 and 30GW by 2020.

■ Agreement could lead to new contracts in 1H16

At 0.5x P/B, the market is pricing in long-term negative growth, or short-term financial difficulties. With its strong cashflows, we view the latter as being unlikely. We only expect one year of negative earnings growth, caused by the operational issues faced this year, and expect earnings to rebound in FY16 as its newly-delivered liftboats begin work. We view this agreement to be the next engine of growth for Ezion, with new contracts potentially being signed in 1H16.

Technical Analysis

■ Long-term investors should do well

Ezion’s stock is one of many casualties in the depressed oil & gas sector, where markets are pricing stocks as though oil prices will stay under USD40/bbl for the long term. RHB expects oil prices to rebound to USD50/bbl next year, and USD60/bbl in 2017. Ezion remains our Top Pick in the sector for its longterm contracts and its deep-value at <3x FY16F P/E and 0.4x FY16F P/B. (Read Report)