SINGAPORE (Feb 28): UOB is upgrading Ezion to “buy” with a target price of 45 cents on improved cash flow situation and expectations of an earnings recovery as the risk of impairments has diminished.

Ezion reported a headline net loss of US$66.6 million ($93.6 million) for 4Q16 and US$33.6 million for FY16, taking an impairment charge of US$70.9 million.

These were for additional writedowns of US$4-7 million on chartered assets that saw lower dayrates, US$20 million of trade receivables as well as impairments on the deposits of equipment purchased for four rigs that have been delayed.

Ezion also faced some unanticipated operational issues in 4Q16, resulting in the results slip. These issues, including delays due to weather and difficult business negotiations on existing charters, are expected to persist into 1Q17, with operational pick-up likely to come earliest in 2Q17.

However, Ezion announced it was indefinitely postponing the construction of four service rigs, freeing up US$270 million in cash commitments.

Meantime, Ezion has successfully renegotiated its net annual principal repayment with its bankers, matching it with their operating cashflows. Moreover, with the much-needed
capex reduction, cashflow pressures have largely eased.

“The new framework provides a sustainable route for Ezion to position for the recovery,” says Foo.

More importantly though, as long as oil prices stay stable, Foo says the risk of their rigs losing work or facing more dayrate reductions is reduced. This in turn leads to a lower likelihood of large impairments.

“We have revised our earnings for 2017 and 2018 to a conservative US$30 million and US$35 million respectively. Our 2019 earnings forecast is introduced at US$41 million,” says Foo.

Shares of Ezion are down 1.5 cents to 36.5 cents.