Ezion Holdings: Preference shares issue not dilutive in FY10

By Low Pei Han
Tue, 27 Jul 2010, 15:20:54 SGT

Ezion Holdings (Ezion) announced that it has entered into a letter of agreement with Venstar Investments Pte Ltd in relation to a proposed issue up to 53m redeemable exchangeable preference shares by a wholly-owned subsidiary that will be incorporated. The issue price is S$1/preference share. Net proceeds will amount up to about S$51.3m, and the bulk of it will be used to fund the marine supply business of the subsidiary. Assuming all preference shares are ultimately exchanged for Ezion’s stock, there will be up to about 80.4m new ordinary shares, representing about 11.3% of Ezion’s current share base. We note that there will be no dilution in FY10, given the structure of the deal. We estimate maximum dilution in FY11 is 28.2m new ordinary shares. We ease our fair value estimate to S$0.79 (prev. S$0.81) to account for potential dilution but maintain our BUY rating on the stock.

To issue up to 53m preference shares. Ezion Holdings (Ezion) announced that it has entered into a letter of agreement with Venstar Investments Pte Ltd in relation to a proposed issue up to 53m redeemable exchangeable preference shares by a wholly-owned subsidiary that will be incorporated. The issue price is S$1/preference share. Net proceeds will amount up to about S$51.3m, and 60-70% of it will be used to fund the marine supply business of the subsidiary while the rest will be used to acquire offshore and marine assets.

Deal structured so that dilution impact is spread out. 35% of the preference shares can be exchanged to ordinary shares of Ezion at S$0.6589/share (6.5% discount to Ezion’s last close) any time from 1st anniversary of the issue date till maturity, while the remaining 65% can only be exchanged at specified time periods as well (Exhibit 1). Hence assuming that all preference shares are ultimately exchanged, there will be up to about 80.4m new ordinary shares, representing about 11.3% of Ezion’s current share base. However, there will be no dilution in FY10 and assuming that the issue date is as early as 1 Aug 2010, maximum dilution in FY11 is 28.2m new shares. Potential dilutive effects are spread out.

What happens after maturity. Within five business days after maturity, the subsidiary has the option to redeem any amount of the outstanding preference shares that have not been exchanged. The redemption price is S$1.45/share. If the subsidiary does not wish to redeem the preference shares, they will then be automatically exchanged into ordinary shares based on a formula that results in 2.2 new ordinary shares per preference share outstanding (according to our estimates).

Move not surprising. Given that the group recently announced plans to develop two marine supply bases that may require up to A$72m for all phases (A$24m for Phase 1), this placement is not surprising to us. The deal’s structure also illustrates Venstar’s confidence in the group’s profitability for the next few years. Chances of contract wins from Australia are also higher with the development of these strategically-located marine supply bases. We ease our fair value estimate to S$0.79 (prev. S$0.81) to account for potential dilution but maintain our BUY rating on the stock.

Disclaimer for Research Report

This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. OCBC Investment Research Pte Ltd, OCBC Securities Pte Ltd and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

Privileged/Confidential information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of this message to such person), you may not copy or deliver this message to anyone. Opinions, conclusions and other information in this message that do not relate to the official business of my company shall not be understood as neither given nor endorsed by it.

For and on behalf of OCBC Investment Research Private Limited:

Carmen Lee
Head of Research

Co.Reg.no.:198301152E