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Broker's take: KGI downgrades Ezion to 'sell' on weak fundamentals

Friday, November 11, 2016 - 10:51

KGI Securities has downgraded Ezion Holdings to a sell from a hold due to the company's weak fundamentals and high valuation compared to international peers.

"Since our last update, Ezion's share price has risen by about 50 per cent and presents considerable downside risk. Thus, we downgrade Ezion to sell,'' KGI analyst Joel Ng wrote.

He has a target price of 20 Singapore cents for Ezion, which provides service rigs and offshore logistics support services to the oil and gas industry.

At 10.24am, Ezion was trading at S$0.315 a share, down 1.5 Singapore cents, or 4.545 per cent. More than five million shares changed hands.

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A key concern for the stock is the company's weak cash flow position and planned capital expenditure of US$160 million to US$180 million for fiscal year 2017. This, Mr Ng said, might put further pressure on its balance sheet if operating cash flows were to weaken next year. He also noted that Ezion's net gearing after its rights issue is still elevated.

Plaguing the stock is also the prevailing supply overhang in the offshore support sector. "We can expect further reduction in utilisation and day rates, putting Ezion's already low return on equity under further pressure,'' Mr Ng said.

The stock could be dampened if there are further write-downs or impairments, higher than expected capital expenditure due to maintenance and upgrade works, and delays in receivables collection that may put pressure on its balance sheet.

However, a sustained rally in crude oil prices above US$60 a barrel driven by surprise cuts and geopolitical problems could provide an upward catalyst.

Ezion reported on Thursday that its third quarter net profit fell 69 per cent to US$9.4 million from US$30.3 million a year ago.

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