Friday, 19 August 2016

A new addition - Ezion Holdings

Thanks to the roll out of Pokemon Go in Singapore, I have been fairly quiet in the investing realm. However, the achievement of "level 20" milestone has turned my attention back to investing. My recent purchase has been in Ezion holdings in the region of 0.29.

In one sentence, Ezion owns liftboats and charters them out. Its business segment is mainly in South East Asia where many oil wells in SEA are maturing and will require maintenance; this is where the use of liftboats is needed. Its share price has fallen drastically due to Swiber's turn of events and its own recent rights issue. However there are a few positives for the company.

1) Customers

Ezion has a few customers who are national oil companies in the South East Asia region. As these customers are mainly NOC and SOEs, the delinquency rate should be better. However, it is worth noting that Ezion did impair a significant amount of receivables last FY. It is important to note that even despite being national oil companies (NOC), there is still a chance of late payment. One of the most newsworthy article is how Saudi Arabia, a rich oil nation, has delayed payment to its contractors ( see here).

In addition, the company has been trying hard to charter its liftboats as evident by its venture to offshore wind farm support with its partner, a Chinese SOE - Chinese Merchant group.

2) Balance Sheet

The recent rights issue has strengthened Ezion's balance sheet. In addition, Ezion's debt maturity has a long duration. Rolf has provided a good breakdown of Ezion's debt in his blog, which can be found here . A significant portion of Ezion's bonds matures in 2018 to 2021. Hence if liftboat charter rates do not improve in 2018, it will be when I have to reconsider my position.

In addition, one of its debts caught my attention - "Ezion 3.65% 2020". The bond has been uniquely structured in that if Ezion defaults on its s$120 mil bond, DBS will repay on its behalf and convert the amount as loan to Ezion. Details of the bond can be found here . To me, it seems Ezion has the credit support of DBS and this will enable Ezion to get lower interest for its loans. In many business models such as Ezion's, it is important that banks give their backing, otherwise, you will be in for a hard time during tough times like now.

From Ezion's annual report 2015, Ezion's loans are of relative low interest. Furthermore, with the recent rights issue s$140 million, its balance sheet should be strong enough to last till the first tranche of bond due in August 2018.

Ezion's Bank Loans

Worries on Ezion

As a shareholder, Ezion's perpetual securities of 7.0% is a sore thumb. In my opinion, as ordinary shareholders of a company, perpetual securities should be viewed as a debt because 1) perpetual holders are ranked higher than you in an event of liquidation and 2) often, they will have to collect their dividend before you do. I will write more about what perpetual securities are and its effects to ordinary shareholders of a company in a separate article.

Moving back to Ezion. Ezion has perpetual securities which are cumulative and costs 7% per annum. It was issued in 2014 and if the company does not redeem it at the end of 2018, the "interest" will step up to 10% per annum. In my opinion, the company will definitely have to redeem its s$150 million in 2018; this is because "debts" at 10% interest will kill off the company's margin. Hopefully DBS will grant it a loan to redeem its perpetual securities, otherwise another rights issue will happen.


My investment in Ezion is more of a special situation, the company's valuation by Mr Market has been beaten down so much, that there is likely value in it. Post rights, the market is currently pricing Ezion at a market cap of s$551 mil (US$ 410 mil) - valuing Ezion's PPE+ JV+ Associates to be worth 1940mil instead of 2540 mil on its balance sheet. To me, there seems to be a slight mis-pricing, given that its many service rigs are new. However, I do agree that the value of its associates are not worth its 83 million stated because it contains Ausgroup, Charisma Energy and JK tech, which I think are worth much less.

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