Chan Kit Whye on ... EZION: Is its balance sheet healthy?

Prior to his retirement, Chan Kit Whye worked more than 30 years as Regional Finance Director, Financial Controller and Manager in a multinational specialty chemical business. He has played an active role in CPA (Australia) Singapore Branch, taking up positions in its Continuing Professional Development and Social Committees. Kit Whye is a Fellow of CPA Australia, CA of Institute of Singapore Chartered Accountants and CA of the Malaysian Institute of Accountants. He holds a BBus(Transport) Degree from RMIT, MAcc Degree from Charles Sturt University and MBA from Durham Business School.

I am not certain whether its balance sheet is healthy.

Just take some numbers for consideration: Its total debt is US$798 million. Its total equity is US$762 million but that includes Perpetual Securities of US$97 million and Redeemable Pref Shares of US$34 million.

Taking both out of the equity equation, its net equity is US$631 million.

Ezion chart: BloombergUsing that to calculate, its debt/net equity ratio equals 1.62 times, which is very high. Interest on borrowings per quarter is about US$3.3 million.

However, since its huge investment in PP&E over a one-year timeframe, its quarterly depreciation has gone up to about $12.2 million.

Ezion must maintain about US$50 million revenue a quarter in order to support just the interest and depreciation, otherwise they could report an accounting loss for the quarter.

I believe that Ezion's management must have done their homework thoroughly, otherwise they would not have increased their exposure to higher fixed costs.

Ezion NAV is about S$1.00, while its EPS is about S$0.20. If the target price is set at SGD3.18, assuming no growth, its PE will be about 16x while its P/B ratio is about 3.2x.

The PE is acceptable, but I am not too sure about P/B.

(OSK-DMG's report on 17 Jan 2014 said: "Maintain BUY, with SGD3.18 TP. Our TP is based on 13x FY14F earnings. We like the strong earnings visibility in Ezion‘s charter orderbook as well as the company management’s track record in securing charters.")

Chan Kit Whye on ... EZION: Is its balance sheet healthy?

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