Ezra's two deals on Emas Chiyoda Subsea fail to excite investors
Shares in Ezra Holdings staged a modest comeback on June 8
hours before the Singapore-listed company requested a trading halt pending the
announcement of a stake deal involving its 50-50 joint-venture company Emas
Chiyoda Subsea (ECS). The stock, however, saw its gains pared when trading
resumed on June 13 after the deal for ECS to take in Japanese shipping giant
Nippon Yusen Kabushiki Kaisha (NYK) as a strategic partner was announced.
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Tan Hwee Hwee
21 June 2016
Shares in Ezra Holdings staged a modest comeback on June 8 hours before the Singapore-listed company requested a trading halt pending the announcement of a stake deal involving its 50-50 joint-venture company Emas Chiyoda Subsea (ECS). The stock, however, saw its gains pared when trading resumed on June 13 after the deal for ECS to take in Japanese shipping giant Nippon Yusen Kabushiki Kaisha (NYK) as a strategic partner was announced.
Ezra's share price may have taken a beating along with a broad market slide over Brexit fears. The stock has also failed to hold above the S$0.10 mark since the completion of a deal in March to make ECS a 50-50 JV between Ezra and Japanese contracting group Chiyoda Corporation. Its closing at S$0.078 on Monday was also under a third of its 52-week high of S$0.295.
Is the trouble afflicting the stock just another sign of investor reservations about offshore & marine stocks since the oil price crash in the second half of 2014? For those seeking short-term gains amid recent weeks of oil price rally, there is no denying that the dipping of oil back below US$50 has caused continued concern.
But what appears also to be brewing trouble is that the market remains divided in views on Ezra's JV agreements with its new Japanese partners, partly because its subsea business was seen as being priced at a steep discount. Not helping too is that market watchers on either side of the fence are left to speculate on undisclosed JV terms.
BT has confirmed with Ezra's investor relations that ECS will operate nine vessels. Aside from Lewek Constellation and Lewek Falcon, which sit on the books of the subsea JV, the seven other vessels are chartered-in units. Lewek Constellation was reportedly built at US$600 million, which far exceeds the implied US$360 million value for ECS under the JV transactions.
One German banker reckons, however, that swallowing this bitter pill strengthens Ezra's balance sheet through the injection of cash equity and puts the listed group on a better footing than most of other small- to-mid-cap O&M players to pull through the downturn.
But not everyone is as optimistic. An equity analyst questioned if the loss-making subsea business unit of Ezra, previously known as Emas AMC, is sufficiently endowed to hang on until the O&M market recovers, probably from the end of 2017 at the earliest.
Based on financial statements obtained by BT, Emas AMC, the then subsea business of Ezra has about US$44.8 million in cash and bank balances as at May 31 2015. It is unclear from the August 2015 SGX disclosure on the Chiyoda JV deal, if Ezra will re-inject cash received from Chiyoda into the now ECS, although the Singapore-listed company has said it will pump all US$36 million proceeds received from NYK into the JV. Chiyoda and NYK will also extend about US$11.7 million and US$8.3 million in shareholder loans to the subsea JV.
For the three subsequent quarters from May 31, the subsea unit incurred losses of US$16.7 million, US$36.7 million and US$29.8 million. Assuming the loss-making streak persists in the quarters leading to the end of 2017, ECS may require fresh cash injections before the projected market recovery. "The Japanese (Chiyoda and NYK) would need to carry the baby (that is ECS) for another 1.5 years," the analyst said.
Notwithstanding their financial strengths, Japanese companies have not quite proven they have the knack for O&M businesses. Offshore ship broking and consultancy group M3 Marine's managing director, Mike Meade, cited Sanko Energy as one Japanese shipping company to have burnt its fingers in its O&M foray, because "it doesn't understand the execution of (riskier) O&M businesses". Sanko Energy subsequently "lost its equity" in its O&M venture and the then employees with the business unit "lost their jobs", Mr Meade said.
Investors have to factor this further unknown in drawing their own conclusions on the value proposition of the ECS JV.