Ezion

Ezion: DMG Insti has a sales note on the counter, with house still largely favouring the stock. Note that using a DCF model and ONLY FACTURING IN THE ANNOUNCED CONTRACTS, with an 8% discount rate (the rate they issued the perpetual notes at) house derive a current price of $1.66, v the spot price today of $1.80, so at this price, despite the run, you are still only paying for orders already won, and not for future orders. House also factored in a valuation if they continue to keep winning contracts at the current rate. IF we factor in another 10 liftboats (US$ 1.1b worth of new orders) over the next 5 yrs, then we can easily get a price of $2.52 (40% higher than today) assuming that there is no rerating of the multiple (currently 8x PE) from the increasing cashflow generation nor from the continued earnings growth (96% this year). Since Ezion issued their perpetual notes Sept last year, they have announced almost US$700m in new contract wins, US1.4b in the last 12 mths and more than US$2B since the first liftboat in 2007. Clearly demand is still growing for their products, and mgt have stated that they are targeting to expand their fleet to own 20 rigs (including JV’s) by 2014. Last week Ezion were reported to be going to issue another US$40m in perpetual notes, but the issue has been postponed for the moment as the bankers believed that it would require an interest rate yield greater than 8%. Ezion are not desperate for the money, as they have enough free cashflow coming in that they can redirect it, until such time as the market is “less demanding” (there had already been several successful issuances just prior already, and a problem with a Chinese perpetual which spooked the market but should not have had any effect on Ezion). They also still have the option of a sale and lease back on the various liftboats that they own, which is much more economic on a risk adjusted basis. To put things in perspective, house also modeled up a scenario where they did issue them at a rate of 8%, and then announced the successful tender for a service rig, along the same lines as the recent contract that was announced in November, for delivery in 2014. This contract, despite the higher debt costs, further added another 18c per share to the valuation. Whilst they may not need the money, given the IRR in excess of 30%, each contract win is extremely profitable, even at a rate over 8% interest cost. Technically speaking, Ezion looks to be consolidating after a very strong run around the $1.80 level. House will be a big buyer into any pull back as the guaranteed earnings growth to come through, not just this year (96%), but in 2014 as well (35%+) mean that you get an unusual level of certainty. Will continue to buy with a break of $1.90 with volume increase, or below $1.65 for a pull back. Use a break of the $1.55 level as a stop.