Ezra Holdings Limited (SGX: 5DN) had released its fiscal third-quarter earnings result this morning. 2015 has been terrible for Ezra so far with its shares falling by nearly 70% since the start of the year. Unfortunately, the picture might look even bleaker in the future if we’re to use the company’s latest quarterly earnings as a guide. Before we dive into Ezra’s latest financials, here’s a brief introduction of the company’s various business divisions and what they do (this will be useful for some context later): Offshore Support and Production Services – This division deals with the ownership and chartering of…
Ezra Holdings Limited (SGX: 5DN) had released its fiscal third-quarter earnings result this morning.
2015 has been terrible for Ezra so far with its shares falling by nearly 70% since the start of the year. Unfortunately, the picture might look even bleaker in the future if we’re to use the company’s latest quarterly earnings as a guide.
Before we dive into Ezra’s latest financials, here’s a brief introduction of the company’s various business divisions and what they do (this will be useful for some context later):
- Offshore Support and Production Services – This division deals with the ownership and chartering of offshore support vessels.
- Marine Services – Ezra provides fabrication of self-elevating, mobile offshore units under this division.
- Subsea Services – This is Ezra’s largest division, accounting for 70% of total revenue in the fiscal year ended 31 August 2014 (FY2014). It deals with “subsea installation of umbilicals/power cables, pipelines as well as platforms, FPSO and floater installations.”
For the fiscal third-quarter, Ezra recorded a 3% year over year drop in revenue to US$390.7 million. However, due to a much lower gross margin, Ezra’s gross profit plunged by 30% from a year ago to just US$45.6 million for the reporting quarter.
The pain flowed through the income statement as Ezra reported a loss of US$3.0 million that is attributable to shareholders for the quarter; this is a sharp contrast to the profit of US$8.3 million that was seen a year ago.
Ezra is still struggling with its high debt load. As of 31 May 2015, its total debt to equity ratio stands at 129% and the company had incurred financial expenses (mainly due to interest payments) of US$12.1 million in the reporting quarter alone. To the point about the financial expenses, that’s more than a quarter of the company’s gross profit and paints a picture of a company with very little wiggle room for error.
Balance sheet updates (and the dangers of leverage)
To address the debt issue, Ezra has recently undertaken a series of massive capital raising exercises, including a rights issue. Here’s how the company describes the rights issue in the earnings release:
“On 23 June 2015, the Company obtained shareholders’ approval at an extraordinary general meeting for the issue of up to 1,925,526,236 new ordinary shares (“Rights Issue”) in the capital of the Company (the “Shares”) on the basis of 190 rights Shares (“Rights Shares”) for every 100 existing Shares held by shareholders of the Company at S$0.105 per Rights Share. The Rights Issue is fully underwritten by Credit Suisse (Singapore) Limited and DBS Bank Ltd and is expected to provide the Company with gross proceeds of S$202.2 million (US$150.6 million).”
Ezra’s current predicament is a good highlight of the dangers of using leverage.
Leverage does wonders for a firm when things are going well; the company’s return on equity increases, and it has more capital to fund future growth. But when the business environment sours – like Ezra’s did when the price of oil fell sharply in the second half of 2014 (oil is currently less than US$60 per barrel, a far cry from its 2014 peak of more than US$100 per barrel seen near the middle of the year) – leverage then becomes the enemy.
When a company is unable to keep up with its interest payments from the cash that’s generated by its business alone, it would have to find capital elsewhere. A common source would be from existing shareholders in the form of a rights issue.
This is a no-win situation for both parties: The company is forced to sell more shares of itself just when its share price is under pressure from a weak business environment. Meanwhile, shareholders are pressured to invest more money into a firm or risk being severely diluted. The problem’s compounded for shareholders if the company’s line of business is now finding it hard to earn adequate returns on equity.
A future outlook
I mentioned earlier that the future may not look too good for Ezra. The reason for doing so comes from the company’s own outlook given in its fiscal third-quarter earnings release (emphasis mine):
“The Offshore Services Industry continues to experience significant challenges in its growth outlook in the light of the current oil price environment which would likely lead to reduced oil & gas spending and activity. Consequently, [Ezra] is likely to face strong headwinds in the foreseeable future.”
As an example, here’s how Ezra describes the impacts that its Offshore Support and Production Services division is facing (emphasis mine):
“As a result of the weakness in the operating environment, the Offshore Support and Production Services Division is likely to experience lower charter rates and/or decreased vessel utilization which will have an impact on the division’s financial performance.”
A slowdown in the oil & gas services industry is certainly not within Ezra’s control. But, Ezra might not have had to face its current predicament – having a weak balance sheet and being forced to raise capital in a difficult business environment – if it had resisted the temptation to assume higher leverage in the first place. Let’s hope the infusion of capital from the rights issue can mark a positive turning point for the company.
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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 Stanley Lim does not own any companies mentioned above.