SINGAPORE (Aug 12): OCBC Investment Research and UOB KayHian are maintaining their “hold” recommendation on Ezion Holdings after disappointing second quarter earnings.

According to UOB KayHian lead analyst Foo Zhiwei, Ezion’s earnings appear to have “bottomed out”.

Foo believes 2H16 will be the “inflexion point” for Ezion’s earnings, as five units are expected to return to work. Beyond that, Foo expects another four units to be operational. UOB Kay Hian has reduced its earnings forecast for FY2016 by 31% to US$52 million and FY2017 by 37% to US$79 million.

However, one of the biggest risks for Ezion could come from Ausgroup. Ezion currently holds a 17% stake in Ausgroup and has a A$37.2 million ($38.5 million) loan with it.

Ausgroup is currently in the midst of a financial restructuring, after defaulting on its bond in May.

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“In the event that Ausgroup is forced to liquidate, Ezion will likely have to make a significant provision for it, estimated at US$43 million. This will severely impact our reported earnings forecast of US$63 million,” says Foo, who reduced his earnings forecast for FY2016 by 31% to US$52 million and FY2017 by 37% to US$79 million.

There is also the risk of contagion from another liquidation incident in the oil & gas industry. OCBC lead analyst Low Pei Han notes that the Swiber incident have “greatly affected sentiment in the O&M sector”, making it difficult for companies to raise funds.

“Fortunately for Ezion, the group was able to raise about US$100 million from its recent rights issue before news about Swiber broke out,” Low says in a Friday note.

To recap, Ezion reported a 31.5% fall in net profit to US$19.8 million in 2Q after earnings from associates and joint ventures declined 88%.

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Revenue came in 7% lower at US$83.7 million as Ezion continued to offer lower dayrates to its client in the lower oil price environment, and gross margins fell 3.9 percentage points to 21% due to a number of units undergoing modifications and routine class surveys.

Furthermore, Foo says that if oil prices fall below US$30 per barrel, Ezion could face another round of day rate cuts for its service rigs.

UOB Kay Hian is lowering its target price to 31 cents from 51 cents while OCBC has lowered its fair value estimates to 30 cents from 42 cents.

Shares in Ezion are trading 1.7% higher at 30 cents.

Inflexion point ahead for Ezion

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Inflexion point ahead for Ezion

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