EZRA: Deal with Chiyoda unlocks value for shareholders

DBS Vickers analyst: Suvro SARKAR

Shot in the arm for subsea division. Ezra announced a landmark transaction for its subsea unit EMAS AMC, as it proposes to rope in Japanese engineering player Chiyoda Corporation as a partner in the business. 

Chiyoda will invest up to US$180m for a 50% stake Ezra’s subsea business to form a JV company – EMAS Chiyoda Subsea. Including third-party debt and shareholder loans, this transaction values the subsea division at around US$1.25bn. Ezra will capitalise part of the existing intercompany debt to EMAS AMC to enhance the capital structure of the proposed JV. 

Reputable partner can create synergies.Chiyoda Corp, headquartered and listed in Japan with close to US$1.8bn market cap, has executed numerous EPC projects worldwide, with core competency in design and construction of LNG plants. Chiyoda’s expertise in Front End Engineering Design (FEED) and EPC activities will come in handy for the early phase planning and costing of offshore projects for the subsea division, which is an area that EMAS AMC has lagged so far. The new JV will also benefit from Chiyoda’s strong project management expertise, global network, R&D capabilities and financial muscle in future. 
Unlocks value, upgrade to BUY. No significant gains or losses on restructuring and sale are likely. We are not changing our earnings estimates at this point, pending completion of the deal, which will see the subsea division move to the JV line, and reduce net gearing from 1.0x to 0.8x. The implied US$360m equity valuation for 100% of the subsea business is higher than our estimates, leading us to adjust our valuation for Ezra.
Our SOTP valuation is thus revised up to S$0.30 and given the significant upside from current valuations, we upgrade the stock to BUY. 



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