SINGAPORE, Aug 30 — Ezion Holdings Ltd says it will continue to invest in service rigs to meet the strong demand by oil companies in Asia Pacific, Middle East and West Africa.

In order to restructure its Port and Marine Base business in Australia, it is selling wholly-owned subsidiary Ezion Offshore Logistics Hub Pte Ltd (EOLH) and a 90 per cent stake in subsidiary Teras Australia Pty Ltd (TAPL) to SGX-listed AusGroup Ltd for S$55 million (RM138 million).

But before we delve any deeper in to the deal, here is a quick look at the company’s recently announced earnings for Q2 2014:

Revenue: +37.8 per cent to US$92.6 million (RM291 million)

Profit: +25.5 per cent to US$45.5 million

Forex gain/(loss): (US$1.2 million) vs (US$0.1 million)

Cash flow from operations: US$39.9 million vs US$25.9 million

Dividend: Nil

Order book: Not disclosed

Revenue was higher due to charter income from deployment of additional service rigs during the quarter, compared to a year ago.

However, it didn’t disclose how many more service rigs were leased out in Q2.

Ezion says ‘other operating expenses’ surged more than four times due to increase in staff.

Again, it didn’t disclose how much its staff increased by.

During Q2, it raised US$151.3 million in net proceeds by issuing 100 million new shares at S$1.94 per share to Hong Leong Company (Malaysia) Berhad.

Along with the Q2 earnings report, Ezion announced a bonus issue of one new share for every five already held.

DMG & Partners Research finds Q2 earnings to be in line with its expectations.

According to the broker, Ezion had 16 service rigs operational in Q2 and 11 service rigs are scheduled to join its fleet in the second half of the year.

Also, nine new rigs are scheduled to join its fleet in 2015/16.

Ezion is working on adding more units to its fleet, adds the broker.

DMG & Partners Research has a BUY rating on Ezion’s stock with a target price of S$3 per share.

Analysts Low Pei Han and Wong Teck Ching at OCBC Investment Research find Ezion’s H1 earnings to be about 46 per cent of their full year estimate.

According to OCBC’s latest research report, Ezion had 18 service rigs operational during Q2, two fewer than DMG.

Also, OCBC estimates 8 or 9 service rigs will be added to Ezion’s fleet in the second half of the year, not 11 as DMG says.

OCBC maintains a BUY rating on the stock with a target price of S$2.78 per share.

However, the broker estimates the target price to be revised to S$2.31 per share after the proposed bonus issue.

Analyst Yeak Chee Keong at Maybank Kim Eng finds Q2 results to be in line with estimates.

Ezion is the broker’s ‘preferred pick’ within the sector.

In contrast to DMG & Partners’ and OCBC’s research reports, Maybank Kim Eng says Ezion will deploy 6 liftboats in the second half of the year.

The broker has lowered its FY14 net profit estimate by 4 per cent but raised its FY15-FY16 estimate by 4 -13 per cent due to ‘contract schedule and value adjustments’.

Maybank Kim Eng maintains a BUY rating on Ezion’s stock with a target price of S$2.85 per share.

Analyst Ho Pei Hwa at DBS Group Research finds Ezion’s H1 earnings to be about 40 per cent of her full year estimate.

According to the broker, Ezion’s 17 service rigs were operational during Q2, compared to just 12 in the same quarter last year.

The broker estimates its fleet size to grow to 26 vessels by the end of the current year, and 34 vessels by the end of next year.

It expects Ezion to record a gain of S$69 million on the sale of the Port and Marine Base business to AusGroup.

DBS Group Research maintains a BUY rating on the stock with a target price of S$2.90 per share.

The target price will be revised to S$2.42 per share after the proposed bonus issue, adds the broker.

Investor Central. We keep your investments honest.

1. What is its official fleet size?

As Ezion has not mentioned the fleet size in its earnings report, shareholders only have the brokers’ reports to rely on.

Unfortunately, the brokers are not unanimous about its fleet size.

DMG & Partners estimates 16 operational rigs in Q2 and an addition of 9 new rigs in the second half of the year.

OCBC says the company had 17 rigs that were operational in Q2 and it estimates addition of 8 or 9 new rigs in the remaining two quarters.

Maybank Kim Eng says the company will deploy 6 new liftboats in the second half of the year.

And DBS Group Research says it had 17 service rigs that were operational during Q2.

In the middle of such variety of estimates, we wonder what the actual fleet size of Ezion is. Also, how many more service rigs will it add to its fleet?

2. What kind of bonus shares are issued without capitalising the reserves?

Investors hoping for Ezion’s shares to be more liquid must be delighted after the company announced a second bonus issue in less than a year.

On July 31, Ezion announced a bonus issue of one new share for every five already held.

Last year, on Aug 7, Ezion announced a bonus issue of one new share for every five already held.

The bonus shares were listed and quoted on SGX Mainboard on Nov 15.

Both the issues have one thing in common: the bonus shares were, and will, be issued fully paid at nil consideration, without capitalisation of the company’s reserves.

In line with that, last year, Ezion’s share capital didn’t increase after the bonus issue as the company didn’t receive any cash or profit in lieu of cash.

However, Ezion’s outstanding share base increased by 20 per cent.

Going by the precedent, we can safely assume that it is what would happen this year, too.

Now that’s a bit odd because bonus issues are understood to be a distribution of company’s profits in shares, instead of a cash dividend.

Therefore that makes us wonder how Ezion’s bonus issues are any different from a sub-division of shares.

Aren’t every 6 shares of the company after the bonus issue worth as much as every 5 shares were worth before the issue? Isn’t that what happens on a sub-division of shares?

3. How did the independent valuer arrive at a S$55 million valuation of its Port and Marine Business?

Now let’s get back to the Ezion’s proposed sale of its Australian Port and Marine Base business to AusGroup.

Ezion is selling Ezion Offshore Logistics Hub Pte Ltd (EOLH) and Teras Australia Pty Ltd (TAPL) to AusGroup for S$55 million.

The deal price of S$55 million was based on an independent valuation report, prepared by Stone Forest Corporate Advisory Pte Ltd on July 10.

To pay for the acquisition, AusGroup will pay S$14 million in cash and issue 92,155,541 new shares to settle the remaining S$41 million.

Ezion has also agreed not to compete with AusGroup in businesses similar to EOLH and TAPL for three years from the date of completion of the disposal.

EOLH is an investment holding company with a paid-up and issued share capital of S$100,000.

It has two direct subsidiaries namely, Ezion Offshore Logistics Hub (Tiwi) Pty Ltd (EOLH Tiwi) and Ezion Offshore Logistics Hub (Exmouth) Pty Ltd (EOLH Exmouth).

EOLH Tiwi further has a subsidiary namely, Indigenous Marine Logistics Pty Ltd (IML).

EOLH Exmouth and IML are dormant subsidiaries.

According to Ezion’s announcement, EOLH Tiwi is “Engaged in the business of operating a port and a marine supply base providing, inter alia, administrative, storage and logistics support to various vessels, including those from oil and gas projects in the region. However, EOLH Tiwi is still in the process [of] setting up the port and the marine supply base and has yet to fully commence operations.”

Ezion’s 90 per cent-owned subsidiary Teras Australia Pty Ltd (TAPL) has an issued and paid-up share capital of A$1.25 million (RM3.67 million).

According to Ezion’s announcement, TAPL ‘provides ship chartering services and maritime training to indigenous workers in Australia.’

The remaining 10 per cent stake in TAPL is owned by Aboriginal Maritime Pty Ltd (AML).

Last year, Ezion bought a 20 per cent stake in AML.

According to AusGroup’s announcement (page 3), EOLH and TAPL had a negative book value of S$13.7 million on June 30.

The negative book value was due to accumulated losses of EOLH and TAPL.

EOLH and TAPL recorded a net loss of S$7.2 million in FY14 ended June 30.

AusGroup said that the losses were due to ‘start-up and administrative costs’ of EOLH Tiwi, which is yet to commence its operations.

It is perplexing that EOLH and TAPL have been valued at S$55 million even though they had net liabilities of S$13.7 million on June 30.

EOLH Tiwi is the only company which apparently seems to own some significant assets.

DMG & Partners’ July 23 research report says Ezion’s marine base business is the only gazetted international port in northern Australia capable of serving the local oil & gas industry.

The broker only expects the port to generate significant revenues and earnings in 2016/17.

However, it is not the first time Ezion is trying to sell its Australian Port and Marine business.

On Sept 30 last year, Ezion announced that it had agreed to sell EOLH Tiwi to SGX-listed Ocean Sky International Ltd for S$100,000, arrived at on “an arm’s length and willing-buyer and willing-seller basis.”

According to the announcement, EOLH Tiwi had net liabilities of A$3.8 million on June 30 last year.

At the same time, on Sept 30, Ezion also agreed to acquire a 45.15 per cent stake in Ocean Sky International by subscribing new shares in its capital.

However, on Feb 12, Ezion and Ocean Sky International terminated the deal as SGX viewed the arrangement as a ‘reverse takeover’.

Long story short, we wonder why EOLH Tiwi should be worth millions now when it was worth just S$100,000 a few months ago. What has changed between September 30 and July 22? What made Stone Forest Corporate Advisory Pte Ltd value EOLH and TAPL at S$55 million? A copy of the valuation report is available for inspection at AusGroup’s registered office at 36 Tuas Road, Singapore for a period of three months.

4. Why isn’t the valuation report available online – or at AusGroup’s office?

Ezion says a copy of the valuation report is available for inspection at AusGroup’s registered office at 36 Tuas Road, Singapore for a period of three months.

However, when we visited on August 19 the receptionist had no idea what report we were asking for.

A colleague was also unable to help, until one suggested we contact AusGroup’s Australia-based CFO Gerard Hutchinson.

We emailed him asking for the report but, at the time of publication, had not received a reply.

We wonder why the companies couldn’t provide a copy of the valuation report on their websites and/or through an announcement on SGXNet.

Or why the report wasn’t available at 36 Tuas Road when the disclosure clearly said it was.

5. Should it account for AusGroup as a subsidiary?

According to its 2013 annual report (page 62), Ezion consolidates the business combinations from the ‘date on which control is transferred to the Group’.

It adds, ‘In assessing control, the Group takes into consideration potential voting rights that are currently exercisable’.

Ezion bought a 6.9 per cent stake in AusGroup Ltd via ‘married deals’ on April 3.

Also, Captain Larry Johnson - the Chief Operating Officer of Ezion - and Eng Chiaw Koon - director, special projects at Ezion - have been appointed as executive directors of AusGroup (refer page 6 of AusGroup’s July 23 announcement).

Together, Ezion, Captain Larry Johnson and Mr Eng Chiaw Koon also own 145 million options which are convertible into 145 million new shares of AusGroup (refer page 34 of AusGroup’s June 4 circular).

Even before it exercises any of its options, Ezion is the single largest shareholder of AusGroup.

In its June 4 circular (page 33), AusGroup said that the ‘grant of Options to Ezion would constitute a transfer of a Controlling Interest in the Company’.

That’s because if Ezion and its director/employee exercise all of their options, Ezion will own a direct and indirect stake of 23.3 per cent in AusGroup (refer page 34 of the June 4 circular).

Therefore that would make Ezion a controlling shareholder of AusGroup.

And after the 92,155,541 new shares that AusGroup will issue to Ezion, to partly settle the S$55 million consideration for acquiring EOLH and TAPL, Ezion’s stake would further increase to more than 31 per cent.

Evidently, Ezion is the single largest force on the Board and in shareholders’ register of AusGroup Ltd.

Ezion might argue that it will gain control of AusGroup only after it exercises the options within 5 years from the date of issue.

But wouldn’t Ezion exercise the options whenever it sees a threat to its dominance and influence at AusGroup? In that case, doesn’t it already control AusGroup? In its Q2 earnings report, Ezion’s stake in AusGroup was recorded as an ‘investment in available-for-sale investment’.

6. Why did it buy back Teras Conquest 4 Pte Ltd within two years of selling it?

On Jan 2, Ezion agreed to buy a 100 per cent stake in Teras Conquest 4 Pte Ltd from Venstar Investments Ltd, Venstar Investments II Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd, for US$32.5 million.

In return, Ezion issued 18,392,046 new shares at an issue price of S$2.2407 per share to the vendors on Jan 17.

Teras Conquest 4 Pte Ltd had a US$40 million outstanding loan on its books in Jan (source: Maybank Kim Eng’s Jan 3 research report).

But here is the best part: Ezion owned Teras Conquest 4 Pte Ltd until it sold it to undisclosed buyers for US$25 million as recently as Feb 15, 2012.

Now that it is buying a 100 per cent stake from Venstar Investments Ltd, Venstar Investments II Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd, we assume it originally sold Teras Conquest 4 Pte Ltd to them in Feb 2012.

The key asset of Teras Conquest 4 Pte Ltd is a Liftboat which was leased-back to Ezion for a period of 6 years from Feb 2012.

In Feb 2012, the Liftboat was estimated to be worth about US$77.5 million.

Ezion recorded a US$13.8 million gain on disposal of Teras Conquest 4 Pte Ltd and a net cash inflow of US$23.2 million in 2012 (refer pages 50 & 51 of its 2012 annual report).

According to Maybank Kim Eng’s Jan 3 research report, Ezion was paying about US$11 million in annual lease for the Liftboat.

That means, Ezion had paid about US$21 million in lease payments to Teras Conquest 4 Pte Ltd from Feb 2012 to Jan 2014.

That’s how Teras Conquest 4 Pte Ltd seems to have recorded a US$4.9 million pre-tax profit in the first nine months of 2013 (refer page 4 of Ezion’s Jan 2 announcement).

According to Kim Eng’s report, Ezion sub-leased the Liftboat which was deployed in West Java Sea.

Ezion plans to re-flag the Liftboat to Indonesian flag which will help it raise the charter rate by about 10 per cent, added the broker.

Venstar Investments Ltd, Venstar Investments II Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd appear to be making a direct gain of US$7.5 million on the acquisition and disposal of Teras Conquest 4 Pte Ltd in a period of less than two years.

Apart from that, we don’t know how much more they earned in terms of dividends from, and other arrangements with, Teras Conquest 4 Pte Ltd between Feb 2012 and Jan 2014.

From a bird’s eye view, Ezion sold a subsidiary for cash which was later bought back by issuing new shares in its capital.

In the middle of all this, we wonder how much cash Ezion actually made in the sale and purchase of Teras Conquest 4 Pte Ltd, and leaseback of its Liftboat.

7. Was the disposal of Teras Conquest 4 Pte Ltd a ‘discloseable transaction’?

Ezion agreed to sell a 100 per cent stake in Teras Conquest 4 Pte Ltd for US$25 million on Feb 15, 2012.

In its single-page announcement, Ezion didn’t disclose if the sale was a ‘discloseable transaction’ as per the SGX Listing Manual.

According to the latest earnings statements available on Feb 15, 2012, Ezion had a net asset value of about US$257.6 million on Sept 30, 2011.

Based on that, the sale proceeds of Teras Conquest 4 Pte Ltd work out to be about 10 per cent of Ezion’s net asset value on the date of agreement.

According to Rule 1010 of the SGX Listing Manual, a transaction is discloseable if it is worth between 5 per cent and 20 per cent of the value of the deal.

Therefore, the sale of Teras Conquest 4 Pte Ltd was a ‘discloseable transaction’, and Ezion should have announced all the details required under Rule 1010 of the Listing Manual.

Which means, Ezion should have disclosed the identity of the buyers, the book value of Teras Conquest 4 Pte Ltd, the basis of valuation of its Liftboat, the estimated profit on disposal and the use of sale proceeds, etc.

We wonder why Ezion didn’t make an announcement as required under Rule 1010 of the Listing Manual.

8. Who bought Teras Conquest 4 Pte Ltd in February 2012?

Now that Ezion is buying a 100 per cent stake in Teras Conquest 4 Pte Ltd from Venstar Investments Ltd, Venstar Investments II Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd, we can only assume that they were the original buyers in Feb 2012.

Or maybe, the original buyer(s) of Teras Conquest 4 Pte Ltd in Feb 2012 later sold a 100 per cent stake in it to Venstar Investments Ltd, Venstar Investments II Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd.

We won’t know unless Ezion reveals the identity of the buyers of its 100 per cent stake in Teras Conquest 4 Pte Ltd in Feb 2012.

9. Should it have disclosed, in 2012 and 2014, its past dealings with Venstar Investments Ltd, Evia Growth Opportunities II Ltd and Skyven Growth Opportunities Fund Pte Ltd?

In 2010, Ezion had placed S$53 million worth of redeemable exchangeable preference shares (REPS) to Venstar Investments Pte Ltd and Skyven Growth Opportunities Fund Pte Ltd, among others.

The REPS were converted in to 85,299,425 shares of Ezion during 2012 and 2013 (refer page 91 of its 2013 annual report).

Also, on July 18 last year, Ezion issued S$30 million worth of new REPS to Evia Growth Opportunities II Ltd, Evia Growth Opportunities III Ltd, Venstar Investments Ltd, Venstar Investments II Ltd and Venstar Investments III Ltd.

A few months later, on Jan 3, Evia Growth Opportunities II Ltd, Venstar Investments Ltd, Venstar Investments II Ltd and SkyVen Growth Opportunities Fund Pte Ltd sold a 100 per cent stake in Teras Conquest 4 Pte Ltd to Ezion.

Any reasonable investor would wonder why Ezion is so actively transacting with a handful of investors.

More importantly, should it have disclosed its past dealing with the investors at the time of selling Teras Conquest 4 Pte Ltd in Feb 2012 and at the time of buying it back in Jan 2014?

10.      How much did it gain on disposal of ‘assets held for sale’ in 2013?

According to pages 54 & 90 of its 2013 annual report, Ezion’s US$2.64 million worth of ‘assets held for sale’ on Dec 31, 2012 represented the carrying value of a land rig that it had agreed to sell to a third party in 2012. The transaction was completed in Q1 2013.

According to its cash flow statement on page 59 of its 2013 annual report, Ezion recorded a US$1.71 million gain on disposal of the ‘assets held for sale’ which was sold for US$24.85 million in cash during 2013.

But the numbers don’t add up for us.

Ezion seems to have made a gain of US$22.21 million when it disposed of ‘assets held for sale’ worth US$2.64 million for US$24.85 million.

Then, why was only a US$1.71 million gain on the disposal recorded in its profit and loss statement, instead of an apparent US$22.21 million gain? What happened to the remaining US$20.5 million gain?

11.      Who bought the land rig for US$24.85 million?

We couldn’t spot, in Ezion’s annual reports for 2012 and 2013, the name of the ‘third party’ which bought the land rig for US$24.85 million.

Also, we couldn’t spot any announcement about the disposal during 2012 and 2013 on SGXNet.

12. Who sold it ‘vessels’ and ‘rig and other oil and gas related assets’ worth US$539.8 million in 2012 and 2013?

‘Plant and equipment’ on Ezion’s balance sheet has increased from US$270.8 million on Jan 1, 2012 to US$1.46 billion on Dec 31, 2013 (refer page 80 of its 2013 annual report).

In 2012, Ezion bought ‘vessels’ worth US$174.1 million and ‘rig and other oil and gas related assets’ worth US$62.1 million.

However, we couldn’t spot any announcements about the acquisitions on SGXNet.

Similarly, in 2013, Ezion bought ‘vessels’ worth US$131.4 million and ‘rig and other oil and gas related assets’ worth US$172.2 million.

Again, we couldn’t find any announcements about the acquisitions on SGXNet.

We wonder who sold it vessels and ‘rig and other oil and gas related assets’ worth US$236.2 million and US$303.6 million in 2012 and 2013 respectively.

And when were the acquisitions announced to Ezion’s shareholders via announcements on SGXNet?

We have invited the company ([email protected]) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do. — Investor Central

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