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Sunday, September 09, 2007

Ezion @ 1.87 ( Offshore support / Singapore ) 0 comments

Final Poll Results: 10:3

(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1. High valuations

2. Concept/growth stock will find difficulty in attracting further money given current tight liquidity environment

It has been a while since my last writeup and it's time I got back to my old routine.

It seems mightily obvious that tomorrow the market will drop and hence my call materialises straightaway, but a reminder: my call is more for the medium-term of 6-12 months, and anyway a weekend is when I feel like doing some research and do my writeups.

The "honour" this time round belongs to Ezion, known several months back as Nylect and going nowhere both business-wise and stock price-wise another couple of months back. Yet, within the last few months, it has probably been among the listed companies with the most corporate activites, as reflected in the flurry of corporate announcements in the SGX website.

Ezion/Nylect was originally an M&E services provider in the construction industry until Chew Thiam Keng, the former managing director of KS Energy, came into the picture and took up a 145M share placement at $0.056/share in February 07, acquiring effective majority control. What followed was a re-positioning of the group as an offshore vessels charterer/services provider with some small charter deals and further fund-raising exercises, with a 17M new share placement at $0.42 in May, another 29M placement at $1.29 in July, and another 14M coming up soon. Key among the deals was Ezra Holdings, which has gained significant clout in recent years, taking over part equity control from Chew via a purchase of 20% equity stake in Ezion via a 50M-shares vendor sale.

The reasoning the market adopted, in running up the stock from the low 10-20 cts to its current stratospheric $1.80+, was that Chew had prior experience in running KS Tech to become a strong player in the offshore rig market, and could apply the same Midas touch to Ezion. Besides, Ezra could contribute further backing and deals to the company as an equity-holder (indeed, it provided a letter of intent for multi-year charter of 2 units of Multi-Purpose Self–Propelled Jack-Up Rigs from Ezion in July .... units that the latter did not actually own). Lastly, the institutional holders that took up stakes in Ezion via the last two placements --- Legg Mason and Stichting pension fund (a Dutch pension fund) --- surely suggested "big boy" interest?

While there is certainly some logic behind the above suppositions, the exuberance might have been overplayed. That the company was under the red-hot offshore oil-and-gas theme play accentuated the bullishness. The valuation looks abominable. Adding the sum-total of all placement receipts of $53M to the previous net equity of $12M equals $65M, divided by a new total of 275M shares outstanding, equals 23.5 cents net tangible assets, mostly cash. That translates to 7.9X P/NTA ratio. That compares with a P/NTA ratio of 6.4X for Ezra, the most richly-priced of all offshore players. Furthermore, the balance sheet assets of Ezra are primarily in fixed assets (ie. vessels), while that of Ezion are mainly in cash. Under many circumstances, cash is king, but this is an exception, because offshore vessels are heavily in demand now, and the aggressive moves of Ezra over 2004-2006 in vessel orders turn out to have put it in prime position for securing offshore projects; the book value of the fixed assets on its balance sheet are most likely substantially below current market value, having been acquired some time back. On the other hand, Ezion will have to convert its cash on hand into fixed assets that will not come cheap in the current buoyant environment with tight shipbuilding capacity and/or resale market, and as we move along the cycle it might well position itself too late as overall industry vessel supply builds up. The risk is significantly higher, and at a higher valuation furthermore.

The further restructuring and expansion of Ezion will also rest on further fund-raising exercises. The recent liquidity squeeze shows us that nothing can be taken for granted now; capital from now on might be at a premium and while that doesn't mean nobody will be putting money into any venture, it certainly suggests funds will be a bit more discerning with their money. While Ezion has raised cash to follow through with some of its deals secured in the past few months, it is unlikely that new funds will be so glad-handed as to inject new equity without looking at the bottomline after the restructuring; the first FY statement post-restructuring is still several months away, and concrete and strong profitability are unlikely to be seen for some time. It may be cruel to call it a concept stock but until real numbers emerge, that is essentially what Ezion is.

In a risk-averse environment (which might be what we are transitioning towards), value trumps growth. Ezion essentially is a play on streams of accelerating earnings extending far into the future ie. a growth play (being kind now by not calling it a concept play). This is the kind of stock to avoid when there is basically no anchor to its stock price; remember that in an environment with increasing risk aversion, future earnings are discounted at increasingly higher rates and growth stocks will face greater markdowns than value stocks.

I agree that Ezion is a hot-stock-not: Agree/Disagree




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