Would Peter Lynch Buy Ezion Holdings?

ezionIf share price growth was the only criterion that Peter Lynch looks for, then Ezion Holdings (SGX: 5ME) would be an automatic shoo-in for one his portfolios. But Lynch, I suspect, is more discerning than that.

Since 2004, shares in the offshore oil-services company have jumped almost 73-fold, which equates to an annual total return of 54%.

It is not difficult to see why. It is quite an easy business to understand. Easy enough to describe with a Peter Lynch “crayon”. Over the last ten years, the company, which develops, owns and charters offshore assets, has seen its revenues jump from S$39m to over S$350m. Meanwhile, it has turned a loss of S$2.1m into a bottom-line profit of S$202m.

Currently, Ezion is valued at 10 times earnings, which is slightly below its long-term valuation. That is possibly a positive. Additionally, with earnings growth over the last four years estimated to be around 50%, Ezion’s Price-to-Earnings Growth (PEG) Ratio of 0.2 is likely to make Lynch sit up and take note.

The company does have debts, though. Its long-term debts have risen from S$133m in 2009 to over $1b last year. As of last year, its Total Debt to Equity stood at 135%, which is unlikely to impress Lynch. Presently, debts levels are greater than its cash pile, which is also a possible area of concern for Lynch.

To date, Ezion has not paid a dividend. That said, its high retention ratio of 100% coupled with its above-average Return on Equity of 25% could bode well for dividend growth in the future – should it ever decide to pay one.

Inventory level is something else that Lynch likes to look at. In the case of Ezion, inventory levels are almost non-existent. However, Plant & Equipment, which is Ezion’s stock-in-trade, has grown steadily as the business expands. In 2004, it stood at S$6m. By 2009, it had grown to S$282m. Last year it was S$2.1b.

There is much that Lynch would possibly like about Ezion. There are also some areas that Lynch is likely to be concerned about. It’s not an easy call to make.

But Peter Lynch once said: “You don’t have to kiss all the girls”. So, Ezion could be one of those growth companies that he might not be quite ready to pucker-up for at the moment.

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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 Director David Kuo doesn’t own shares in any companies mentioned.