By Low Pei Han
Wed, 3 Feb 2010, 09:32:48 SGT

Ezra Holdings (Ezra) has positioned itself well during this crisis and remains a quality stock; value has also emerged as its price has fallen about 18% since we downgraded it in mid January on valuation grounds. Weaker market sentiment and lower oil prices have affected the stock’s performance as well. For the past four years, Ezra has turned in relatively stable gross profit margins as it has long-term charters in its offshore support business that provide relatively defensive earnings. We understand that EOC, (currently listed on the Oslo bourse) may seek a dual listing eventually. Such a move makes sense as 1) EOC is likely to require more funds for its growth strategy, though not at this point in time; 2) the stock is thinly traded on the Oslo stock exchange, probably due to its low free-float of 36%; 3) most of its assets are deployed in Asia; 4) net gearing remains high at 2.19. With an upside potential of 23% to our unchanged fair value of S$2.54, we upgrade the stock to BUY.

Value emerging despite weaker market sentiment. Ezra Holdings (Ezra) has seen its share price fall some 18% since our downgrade in mid January on valuation grounds; weaker market sentiment and lower oil prices have affected the stock’s performance as well. And we see value emerging as Ezra remains a quality stock.

Relatively stable margins. For the past four years, Ezra has turned in gross profit margins of 30% and higher for FY06 – FY09, which is relatively stable compared to some of other SGX-listed offshore players as it has long-term charters in its offshore support business that provide relatively defensive earnings. This is superior to companies that rely on merely project wins or opportunistic deals as the market may turn any time, which is what happened in 2008.

EOC may seek dual listing eventually. We understand that EOC, which is currently listed on the Oslo bourse, may seek a dual listing eventually. Such a move makes sense as 1) EOC is likely to require more funds for its growth strategy, though not at this point in time; 2) the stock is relatively thinly traded on the Oslo stock exchange, probably due to its low free-float of 36%; 3) most of its assets are deployed in Asia, particularly SE Asia; 4) net gearing remains high at 2.19x, though lower compared to 2.31x as at Aug 09. A better reflection of EOC’s value is likely to support Ezra’s share price, given that it owns 48.57% of EOC.

Projects are well-funded. EOC has not raised funds since the start of the crisis, aided by the defensive nature of its contracts. The company has also mentioned that all its projects are fully funded, be it by debt or internal resources. Its assets are also relatively young, so we do not foresee replacements in the near future (oldest one is Lewek Conqueror at about five years old). However, the company is looking at upgrading its existing vessels by installing additional features or having bigger cranes on them.

Upgrade to BUY. Given that there is now a 23% upside potential to our unchanged fair value of S$2.54, we upgrade the stock to BUY. This is also In line with our house view to use the market correction to re-enter into quality stocks like Ezra, which has positioned itself well during this crisis and the group has bright prospects.