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Can Ezion Holdings Build Upon Its Tremendous 5,900% Gains?

In the foreword to John Mihaljevic’s book The Manual of Ideas, Thomas Gayner, the Chief Investment Officer of American insurer and investment outfit Markel Corporation, wrote: “As Charley Munger once noted, one of the best investments you can make is buying a book. He went on to note that for just a few dollars, you get man-years of an author’s life that went into producing that book for you. I couldn’t agree more.”

I have to agree fully with Gayner. And for any avid student of investing (like me, for instance), consider ourselves lucky that the legendary investor Peter Lynch had penned down two investing classics with those man-years of practical investing experience he had.

Those two books Lynch wrote were One Up on Wall Street and Beating the Street. In particular, the former contained some really useful checklists for investors that Lynch himself had used while he was out searching for his next big investment idea.

The offshore oil & gas outfit Ezion Holdings (SGX: 5ME) has been a remarkable long-term investment for anyone who had invested in it 10 years ago on 2 April 2004. According to S&P Capital IQ, shares of the company were worth S$0.0354 each back then. At today’s price of S$2.13, that translates into an incredible 5,914% gain in price. In contrast, the Straits Times Index (SGX: ^STI) has had a decidedly pedestrian return of 71% at its current level of 3,213 points over the same period.

Given Ezion’s massive market-beating performance over the past decade, it’ll perhaps pique the curiosity of investors and bring up the question: Can this share go on to beat the market in the future? Perhaps Lynch’s checklist can help shed some light on the matter.

1) The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry?

Ezion’s valued at 10 times trailing earnings at its current price, which is actually even lower than the market’s average PE of 14, as represented by the Straits Times Index.

The company’s main business interests lie in the building, ownership, and chartering of offshore assets, as well as the provision of offshore marine logistics and support services to mainly the oil & gas industry. Some of the offshore assets under Ezion’s banner include “one of the largest and most sophisticated class of Multi-purpose Self Propelled Jack-up Rigs (“Liftboats”) in the world”; tugs; ballastable barges; offshore support vessels; and self-propelled barges.

In light of its commercial activities, companies like Swiber Holdings (SGX: AK3), Ezra Holdings (SGX: 5DN), and SembCorp Marine (SGX: S51) could be termed as other companies that operate in the same industry.

Company

Price

Trailing PE ratio

Swiber Holdings

S$0.605

5

Ezra Holdings

S$1.095

16

SembCorp Marine

S$4.01

15

Source: S&P Capital IQ

From the table above, we can see that Ezion’s valuation is a fair bit lower when compared to some of its industry peers and the market in general.

2) What is the percentage of institution ownership? The lower the better

Lynch included this criterion as part of his checklist because he tended to prefer shares that are flying under the radar of other institutional investors (i.e. big money managers); such shares might just be better bargains than well-known listings.

According to Ezion’s 2012 Annual Report, there were a number of institutional investors that are substantial shareholders and this included Franklin Resources Inc. and Havenport Asset Management with a stake of 7.2% and 5.8% respectively as of 15 March 2013. Those shareholdings may or may not have fluctuated from then till today, but at the very least, it shows that Ezion’s not exactly a share that’s unknown by institutional investors.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

A quick glance at Ezion’s corporate announcements over on the Singapore Exchange’s website reveals that there had been no buying of shares from either the company itself or its insiders.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

Ezion ended 2003 with losses, but since then, has improved its bottom-line in each consecutive year. Its historical rate of profit growth has also been really strong as seen in the table below.

Year

Earnings per share
(US cents)

Year-on-year change

2003

-1.27

2004

-1.07

16%

2005

-0.55

49%

2006

0.14

125%

2007

0.71

407%

2008

1.04

46%

2009

1.63

57%

2010

4.70

188%

2011

6.79

44%

2012

7.95

17%

2013

16.4

106%

Source: S&P Capital IQ

In light of the above, it’s perhaps fair to say that Ezion has had a great record of earnings growth along with having consistent earnings.

5) Does the company have a strong balance sheet?

With US$875 million in total debt and US$166 million in cash according to its latest financials, Ezion does not have a particularly strong balance sheet. Though, it’s also fair to point out that Ezion’s in a capital intensive industry where the vessels it owns are not cheap to build, hence necessitating the need for leverage. Its peers, like Swiber Holdings and Ezra Holdings, are also in a net-debt position (where total debt exceeds total cash).

6) Does the company have room to grow?

A look at Ezion’s assets and business activities makes it clear that its future would be tied closely with the growth of the oil & gas industry. If demand for oil and gas as energy resources would still remain strong over the years, it’s likely we’ll see positive spill-over effects for Ezion’s line of work.

In 2013, Ezion’s growth came partly from growing chartering-demand for its offshore assets. For the current year, the company went on record to state that it “expects more assets to be deployed in 2014”. In addition, there’s also the anticipation of new projects that the company might take on.

With all the above, it does seem that there’s still room to grow for Ezion.

Foolish Bottom Line

For Lynch’s checklist, Ezion manages to score well on three fronts: 1) Having a low valuation; 2) consistent and really fast-paced earnings growth, and; 3) having more leg-room to grow.

Can Ezion carry on its winning ways and deliver even more great returns in the future though? In addition to the important factors included in Lynch’s checklist, there are still other considerations investors have to walk through before any investing decision can be made.

What’s the quality of Ezion’s earnings really like? Does management have a history of rewarding shareholders through prudent, decisive, and opportunistic capital allocation? Those are just some of the other considerations we have to think about.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Markel Corporation.