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Is Ezion Turnaround in Sight?

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Ezion Holdings is in the business of chartering out its liftboats, service rigs and barges etc. The company recently underwent a financial restructuring to save itself. It led to a massive dilution of old shareholders who are unlikely to recover their cost price.

What went Wrong and its Financial Restructuring

Ezion’s management made the big mistake during the oil boom days to borrow money extensively to buy oil support equipment thinking that chartering rates will continue to be that high. In 2015, oil prices went down and Ezion’s equipment were chartering at much lower rates and the company was unable to service its massive debts.

The company underwent a financial restructuring in 2017 where i) Banks agreed to lend them money at a lower interest rate but received a large number of shares as part of the agreement, ii) Most bondholders and perpetual bonds agreed to convert their bonds into shares; likely selling it off thereafter and losing a large part of their capital. It resulted in a dilution of shares where Ezion’s share capital increased from 2 Billion shares to 3.7 Billion Shares

Turning Around of Ezion

In Q2FY2018, Ezion posted a terrible set of financial results:

Ezion’s business is still in terrible shape with a quarterly gross loss of $10.9 Million before other expenses. If we were to factor in other expenses and ignoring its one off fair value  and exchange rate gain due to the strengthening US Dollar (recorded as other Income); Ezion is likely to have made a loss $30 Million Losses in the past 3 months.

So how can Ezion Turnaround about $30 Million in Quarterly Loss?

Firstly, Ezion has secured and refinanced its $1+ billion debts on 2 July 2018. This is likely to reduce its quarterly finance expense from $7.8 Million to about $2.0 Million in expense. The arrangement will allow Ezion to enjoy low interest financing until June 2024.

Secondly, many of its lift boats are still idle despite the upturn of the oil industry. According to a DBS brokerage report on Ezion, it is expected 2 more lift boat will be chartered out this quarter at a rate of USD 30+k per day. The chartering of these 2 Lift boats is likely to raise Ezion’s revenue by about US$6 million. 2 more lift boats will also be chartered out in Q4 FY2018.

With the increase in lift boats utilization rates and lower finance expense, I am still expecting Ezion to report losses for the next few quarters. It is only during the next financial year would I expect to Ezion to break even.

Given the scenario described above, Ezion is likely to be worth slightly below its book value of US 12.17 cents (SGD 16.6 cents). Ezion’s fair value is likely only SGD 15 cents.

What Happens in 2024?

Another dark cloud is Ezion’s ability to repay its debts in 2024. By 2024, Ezion will have to refinance its $1.2 Billion of Low Interest Bank debts and $170 Million of Bonds. Given that at a charter rate of $40k USD per day for its 13 liftboats, Ezion is likely to only earn USD$190 Million in annual revenue. It shows that Ezion is likely to have a cash shortfall in 2024 of about $200 Million.

However, I personally doubt it will be a big issue if (i) oil markets don not deteriorate from then and (ii) ezion’s management do not foolishly indulge in huge capital expenditure. What I would like to see is that the management does their job of running daily operations carefully, not to dream big of massive expansion again and pay themselves high salary which amounts to a few million like during those boom times.

Past Shareholders and Bondholders have already made the financial sacrifice and trust that the management will turn things around. It will be incorrigible for Ezion’s management to again betray this trust and second chance offered to them. Will Ezion’s management be sincere enough to correct their mistake or decide to take advantage of peoples’ trust? Who knows.

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