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Ezra?s kitchen-sinking efforts in 3Q13 were warranted on hindsight as subsea turned around nicely in 4Q13. However, it is too early to turn bullish with just one good quarter. Maintain Underperform.
4Q13 core profit of US$7.3m was above our US$2m estimate, bringing FY13 core loss to US$39m. This is ahead of our -US$44m forecast and consensus?s -US$33m, thanks to stronger subsea margin in 4Q13. We lift our FY14-15 EPS by 3-43% for stronger subsea margin and introduce FY16 EPS. Our target price rises to S$1.00 after rolling over to CY15, still based on 11x (-1 s.d. of its 5-year mean). Ezra could be catalysed by positive margin surprises.
Subsea profitable again
Subsea delivered a high single-digit net profit in 4Q13 vs. a loss in 3Q13. Utilisation rebounded to 70-80% with the execution of more projects. Gross margins recovered to pre-3Q13 average of mid-teens. We believe that this could be helped by a few fasttracked transportation & installation jobs in Malaysia and Vietnam slotted in 4Q14. Recall that in 3Q13, subsea was affected by the lack of critical mass, delays and cost overruns for some projects. Subsea secured US$1.25bn of orders in FY13 and the order backlog stood at US$1.1bn.
We expect US$1.5bn of orders in 2014, as Ezra tenders for US$5bn-6bn of jobs. 1Q14 earnings should be stable but we are worried about its utilisation rates in 2Q14 (Dec-Feb) which crosses the Monsoon in Asia and winter months in Europe. We now expect FY14 gross margins for subsea to be 14% (12% previously).
Muted offshore showing
Offshore division's utilisation rose to 94-95% in 4Q13 (3Q13: 70-80%) as more vessels returned to work. Gross margin improved to 20% from 17% in 3Q13. The outlook seems stable as activities are picking up in the Gulf of Mexico and West Africa. The average rate for Ezra's fleet is US$1.75-1.80/BHP. We expect FY14 gross margins for offshore to be 21%.
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Too expensive
At 19.7x CY14 P/E, Ezra?s valuation is double that of its Singapore peers (9x) We would wait until its subsea division delivers consecutive profits with no major hiccups. (Read Report)