Singapore Oil Services Sector

Singapore Energy 21 September 2015

Not yet calling the bottom Initiation: Type your subtitle here Type your subtitle here Type your subtitle here[Sector_Headline]

 Weak E&P spending likely to crimp demand for MODUs and oil  Bullet 1[Sector_Summary Bullets] Bullet 1[Sector_summary Bullets] services Bullet 1[Sector_Summary Bullets]  Cost management critical in ensuring survivability, as the O&G  Bullet 2[Sector_Summary Bullets] Bullet 2[Sector_Summary Bullets] Royston Tan downturn could be a protracted affair Bullet 2[Sector_Summary(65) 6321 3086 Bullets]  Negative sector view; Buy (1) on Ezion, Hold (3) on Pacific Radiance,  Bullet 3[[email protected] Bullets] Bullet 3[Sector_Summary Bullets] and Underperform (4) on Ezra Bullet 3[Sector_Summary Bullets]

Investment case: The Singapore Oil Services Sector’s leading indicators Key stock calls — the oil price and E&P spending — are not yet indicating a bottom. Even New Prev. if these indicators were to show an uptick, we believe that sector Ezion Holdings (EZI SP) Rating Buy Buy fundamentals are being overshadowed by an oversupply issue that must Target 0.940 1.240 be addressed before a sustainable earnings recovery can take hold. In Upside p 31.5% such a scenario, we would look to be positioned in Ezion (EZI SP, Pacific Radiance (PACRA SP) SGD0.715, Buy [1]) and Pacific Radiance (PACRA SP, SGD0.335, Hold Rating Hold Hold [3]), while avoiding Ezra (EZRA SP, SGD0.124, Underperform [4]). Target 0.320 0.400 Downside q 4.5% Catalysts: Demand for OSVs to fall as MODU scrapping accelerates. Ezra Holdings (EZRA SP) Rating Underperform Underperform We foresee demand for offshore support vessels (OSVs) being affected by Target 0.116 0.140 accelerated cold-stacking/scrapping in the mobile offshore drilling unit Downside q 6.5%

(MODU) market. In our view, OSV owners such as PACRA will face a Source: Daiwa forecasts prolonged period of low vessel utilisation, with weak asset demand compounded by strong newbuild supply.

Subsea not immune to downturn. We expect competition in subsea construction to intensify, with a 2015E book-to-bill of below 1.0x. Although Ezra has mitigated credit risks with several corporate actions, the operational outlook for its subsea business remains challenging.

Lifting expectations. The liftboat market, in which Ezion is the region’s market leader, remains buoyant, as evidenced by the company’s 100% contracted fleet. Oil companies will likely remain committed to opex spending to improve well productivity, especially in today’s low oil-price environment, and this calls for greater liftboat usage.

Valuation: We believe Ezion is the most appealing, as it is the market leader in the liftboat segment, where demand for its assets has proven relatively resilient. We have an SOTP-based 12-month target price of SGD0.94 (previously SGD1.24). PACRA is trading at a 0.52x P/RNAV, which provides a margin of safety, in our view. However, given its guidance for a weak business outlook, we do not foresee a stock rerating until its margins prove to be on a sustainable uptrend. Our 12-month TP of SGD0.32 (previously SGD0.40) is based on our revised 2015-16E EPS and a target PER of 8.9x. As for Ezra, despite its 0.2x PBR, we believe its assets remain overvalued and susceptible to impairments and writedowns. A 25% PPE reduction would result in its PBR rising to 0.4x and net gearing to 3.1x (1.2x currently). We have an SOTP-based 12-month target price of SGD0.116 (previously SGD0.14). We reiterate our ratings on all stocks.

Risks: The key risk to our Negative sector view would be a sustainable recovery in oil prices triggering an industry-wide rerating.

See important disclosures, including any required research certifications, beginning on page 54

Singapore Oil Services Sector: 21 September 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Global Oil Services Sector: YoY earnings comparison (USDm) The oil price and E&P spending are often leading 8,000 7,000 indicators of demand within the MODU and OSV markets. 6,000 5,000 Based on our belief there will be no signs in the short term 4,000 3,000 of a sustainable oil price recovery, and E&P spending looks 2,000 1,000 set to decline in 2016, we believe the growth outlook for - the global oil services sector remains unclear over the next (1,000)

6-12 months.

Saipem

Technip

Petrofac Subsea7

Halliburton

Oceanering

International Weatherford Schlumberger According to Bloomberg consensus forecasts, the major BakerHughes

global oil services companies are set to report YoY FMCTechnologies

Amec Wheeler Foster

National OilwellVarco CameronInternational declines in earnings in the current year. 2014 2015E

Source: Bloomberg

Singapore Oil Services Sector: share performance Valuation (YTD) Share prices in the Singapore Oil Services Sector are 1.4 down by 47-69% YTD. Valuations seem attractive on a 1.2 PBR basis, with Ezra, for example, trading at only a 0.2x 1 PBR. However, we caution against using PBR as the sole 0.8 valuation methodology, as assets could be significantly 0.6 overvalued because companies have not been aggressive 0.4 in impairing their assets in recent quarters. 0.2

0 Conversely, we consider Ezion to be attractive, given its

strong order backlog, which provides earnings and cash-

30/01/15 08/05/15 14/08/15 02/01/15 16/01/15 13/02/15 27/02/15 13/03/15 27/03/15 10/04/15 24/04/15 22/05/15 05/06/15 19/06/15 03/07/15 17/07/15 31/07/15 flow visibility for the coming quarters. At current levels, the EZION PACRA EZRA stock is trading close to 2SD below its past-3-year average Source: Bloomberg PBR and EV/EBITDA.

Earnings revisions PACRA: Bloomberg consensus earnings revisions Stocks in the sector have seen downward revisions to the 1.4 0.14 market’s earnings forecasts for the past 3-4 quarters, as 1.2 0.12 the O&G downturn has turned out to be more severe and 1.0 0.10 protracted than many observers had expected. 0.8 0.08 0.6 0.06 However, we believe that 2015 could be the earnings 0.4 0.04 trough for PACRA, and we expect a significant earnings 0.2 0.02 improvement as early as 2016, assuming cost- 0.0 0.00

rationalisation measures prove to be effective.

1/13/2014 4/11/2014 7/14/2014 1/13/2015 4/15/2015 2/12/2014 3/13/2014 5/15/2014 6/13/2014 8/13/2014 9/11/2014 2/11/2015 3/16/2015 5/15/2015 6/16/2015 7/15/2015 8/18/2015

10/13/2014 11/12/2013 12/11/2013 11/12/2014 12/11/2014 Price BEst Standard EPS Adjusted+ 2015* A

Source: Bloomberg

Singapore Oil Services Sector: 21 September 2015

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Ezion Holdings EZI SP 0.715 Buy Buy 0.940 1.240 (24.2%) 0.102 0.114 (10.3%) 0.167 0.173 (3.2%) Ezra Holdings EZRA SP 0.124 Underperform Underperform 0.116 0.140 (17.1%) 0.004 0.004 4.2% 0.006 0.006 (3.8%) Pacific Radiance PACRA SP 0.335 Hold Hold 0.320 0.400 (20.0%) 0.020 0.020 0.0% 0.033 0.047 (28.7%) Source: Bloomberg, Daiwa forecasts

MODUs and OSVs fleet growth 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Jack ups 398 425 464 479 491 487 523 545 605 664 Semi-subs 163 173 195 205 219 223 225 209 203 214 Drill ships 39 42 51 59 77 86 97 120 135 148 Total MODU Fleet 600 640 710 743 787 796 845 874 943 1026 AHTS 1,801 1,956 2,222 2,466 2,650 2,762 2,858 2,929 3,111 3,188 PSV 1,390 1,518 1,632 1,722 1,858 1,970 2,143 2,332 2,659 2,786 Total OSV Fleet 3,191 3,474 3,854 4,188 4,508 4,732 5,001 5,261 5,770 5,974 MODUs utilisation rates 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Jack ups 69% 84% 76% 67% 86% 91% 93% 94% 72% 60% Semi-subs 83% 85% 78% 78% 96% 95% 98% 98% 83% 72% Drill ships 87% 82% 67% 88% 93% 97% 94% 96% 75% 65% MODUs and OSVs day-rates MODUs 2012 2013 2014 2015E 2016E High Specification GoM Jack-ups 148 160 103 98 90 Ultra deepwater GoM floaters 575 575 380 300 280 OSVs V Large AHTS, 18K+ BHP (North Sea) 35,279 24,029 38,655 17,000 15,000 PSV > 800 sqm (North Sea) 13,688 12,022 16,050 4,600 5,000 Source: companies, Daiwa forecasts

Singapore Oil Services Sector: 21 September 2015

Table of contents

Rationalising an oversupplied industry...... 5 Bracing for tougher times ...... 5 Key assumptions on oil ...... 7 Bottom may have been reached, but price could remain depressed ...... 7 Global E&P spending likely to remain weak for years ...... 8 Global E&P spending to track oil prices ...... 8 Sector oversupply a major issue ...... 8 Rig front not looking any rosier ...... 9 Uncommitted newbuild rig supply to worsen utilisation...... 10 OSV attrition not catching up with MODU attrition ...... 13 Weak demand, ample supply in the OSV market ...... 14 Calm beneath the sea? ...... 20 Lifting expectations in a depressed offshore market ...... 22 Survival of the fittest ...... 24 Valuations and recommendations ...... 32 Ezion: target price of SGD0.94 based on SOTP valuation ...... 32 PACRA: trading significantly below RNAV ...... 32 Key risks to our Negative view ...... 38 A rapid recovery in oil prices ...... 38 A stronger-than-expected improvement in margins ...... 38

Company Section Ezion Holdings ...... 39 Pacific Radiance ...... 43 Ezra Holdings ...... 48

Singapore Oil Services Sector: 21 September 2015

Rationalising an oversupplied industry Bracing for tougher times The O&G statistics make for grim reading in today’s offshore universe. The share prices of oil services stocks globally likewise paint an ugly picture, with YTD declines of between -9% and 90% vs. 11-95% for the rig contractors and -11% to 46% for the integrated oil majors (based on Bloomberg’s universe of energy-related stocks; negative figures represent share-price rises).

Brent crude (USD/bbl) 160 140 120 100 80 60 40 20

May 1994May 20, 1995May 20, 2004May 20, May 1988 20, May 1989 20, May 1990 20, May 1991 20, May 1992 20, May 1993 20, May 1996 20, May 1997 20, May 1998 20, May 1999 20, May 2000 20, May 2001 20, May 2002 20, May 2003 20, May 2005 20, May 2006 20, May 2007 20, May 2008 20, May 2009 20, May 2010 20, May 2011 20, May 2012 20, May 2013 20, May 2014 20, May 2015 20, May 1987 20, Source: EIA

Daiwa believes that an oil-price-fuelled recovery in the next 12 months remains unlikely, though oil prices could be near a bottom. We expect this scenario to have a knock-on effect on oil companies’ E&P spending — many have already announced double-digit cuts YoY, and we see a likelihood of such cuts persisting into 2016-17.

With the oil price and E&P spending data for the Oil Services Sector remaining weak, we see little likelihood of an earnings recovery for the sector in the coming 12 months. In the event these indicators do register an improvement, we believe the sector still faces a massive oversupply problem that must be addressed before a sustainable earnings recovery can materialise and drive share prices higher.

In such a scenario, we highlight the following stocks in our universe:

Ezion [EZI SP, SGD0.715, Buy (1)]. We like Ezion’s resilient opex model, which focuses on well productivity and maintenance-related works, coupled with its robust order backlog, which we think provides earnings and cash-flow visibility into 2017. Although its net gearing is fairly substantial, at 1.0x as of 2Q15, its assets are fully backed by a robust order backlog, which should provide earnings visibility through 2017. We have a Buy (1) on Ezion with an SOTP-based 12-month target price of SGD0.94 (previously SGD1.24). Using a DCF approach to value its liftboats/service rigs division, we derive a fair value for Ezion that can be accounted for based on the visibility of cash flow generated from firm contracts in this division. In our view, the recent share-price correction (-37% YTD), which we attribute to company-specific hiccups and weak macro sentiment, provides an opportunity to accumulate the stock at a 24% discount to what we deem as the fair value for Ezion.

Pacific Radiance [PACRA SP, SGD0.335, Hold (3)]. We believe that Pacific Radiance (PACRA) could be one of the first beneficiaries upon an industry recovery, given the likelihood of strong demand for its fleet of young and technically relevant OSVs. The company is in the midst of a cost-rationalisation exercise to reduce its operational and administrative expenses. We would expect to turn positive on the stock upon clearer signs of margin expansion in a generally weak macro environment, which we would take as indicating the company was a leaner entity better placed for a turnaround. As it stands, we rate the stock a Hold (3), with a 12-month PER-based target price of SGD0.32 (previously SGD0.40). PACRA is trading currently at only a 0.52x P/RNAV, which we think provides a

Singapore Oil Services Sector: 21 September 2015

good margin of safety for longer-term investors looking to position themselves for the next upturn. We are, however, concerned about its relatively high gearing, which we forecast to reach 1.0x by end-2015. If the current downturn ends up being further protracted, we think there is a risk that persistently low utilisation and day rates for its assets compound credit- related issues, forcing PACRA to embark on asset sales to pare its debt.

On the other hand, we would continue to avoid Ezra [EZRA SP, SGD0.124, Underperform (4)]. Although the company has a robust order backlog of USD2bn as of 30 May 2015, we believe most of these projects offer thin margins that are at risk in the event of execution issues. Its assets are likely overvalued on its balance sheet, in our opinion, as the company has made minimal impairments since the start of the downturn. Given the real risk of asset impairments eroding equity value going forward, we believe Ezra’s bondholders are better placed than its equity holders. We have an Underperform (4) rating on Ezra with a 12-month target price of SGD0.116 (previously SGD0.14). Near-term credit concerns have eased with the completion of the recent rights issue and the potential sales of 50% of its subsea business to Chiyoda. However, we believe the business fundamentals remain challenging and we foresee no improvement in Ezra’s operational profile following the sale. In our view, a further protracted downturn could result in asset impairments due to weak utilisation, in turn triggering another round of cash calls.

Negative sector rating Amid today’s low-oil price environment, with Brent Crude currently more than 60% below its April 2014 peak of USD115/bbl, we think Oil Services companies need to go through a significant cost-containment exercise if they are to emerge from this crisis in one piece. There has been a lot of pain in the global offshore sector, with vessels being laid up and workers being laid off by the thousands. We think that ultimately only the fittest will survive, with a few companies emerging from the downturn as larger and yet leaner entities.

We have a Negative stance on the Singapore Oil Services Sector. Given our assumption of low oil prices and weak E&P spending for the coming 12 months, we see limited scope for earnings to rebound within the oil service sector. Even if the major leading indicators do show an uptick, we think the issue of asset oversupply needs to be addressed before a sustainable sector recovery can occur. Once the asset oversupply has been addressed, the sector should have a better earnings profile and support higher share prices for the oil services stocks.

Daiwa remains among the most bearish brokerage houses in the market on the O&G industry. Although share prices in the Global Oil Service Sector are down by -9 to 90% YTD, we remain wary of calling for a bottom and would not rule out companies experiencing further financial stress due to rapidly deteriorating credit-related issues. See the section entitled “Survival of the fittest” for a more in-depth evaluation of the business and credit profiles of the stocks under our coverage, and our view of their ability to weather a more protracted industry downturn.

Singapore Oil Services Sector: 21 September 2015

Key assumptions on oil Bottom may have been reached, but price could remain depressed The oil collapse has been widely attributed to a combination of strong supply (OPEC unwilling to cede share amid higher shale production, etc) and weak demand factors (tepid China and Europe demand growth, etc). The result of these factors has been a 60% drop in the crude oil price from its April 2014 peak of USD115/bbl.

Global liquid fuel production and consumption balance 100 3

2 95 1 90 0 85 (1)

80 (2)

Q3 2016Q3 Q12010 Q22010 Q32010 Q42010 Q12011 Q22011 Q32011 Q42011 Q12012 Q22012 Q32012 Q42012 Q12013 Q22013 Q32013 Q42013 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q42016 Implied stock change and balance (right axis) (million barrels per day) World production (left axis) (million barrels per day) World consumption (left axis) (million barrels per day) Source: IEA

The IEA said that many in the industry expect to see oil prices staying lower for longer previous downturns as “muscular pumping” from OPEC’s top producers Saudi Arabia and Iraq is adding to the global excess. Although we believe that the downside for oil prices hereon is limited, prices remaining depressed over the next 12 months is a possibility, in our view. We estimate that such a scenario will result in global E&P spending being weak into 2016-17, which could inherently have a negative impact on the oil services sector.

Singapore Oil Services Sector: 21 September 2015

Global E&P spending likely to remain weak for years Global E&P spending to track oil prices One of the leading indicators for the OSV market is oil prices, via its effect on E&P spending. Historical correlations over the past decade indicate that E&P spending trends closely in line with average oil prices, with a correlation factor of 0.89x (based on data from 2003 to 2014). Without a sustained recovery in oil prices, it is hard for oil companies to justify incremental E&P spending, given shareholders’ desire for more cautious discretionary capex in a downcycle.

E&P spending to decline YoY in 2015E and possibly into 2016-17E Selected oil companies capex cut Oil Major Announced 2015 Capex cut vs. 2014 BP -13.0% Exxon Mobil -12.0% Shell -20.0% Occidental -33.0% Conocophillips -33.0% Chevron -13.0% Anardako -33.0% Statoil -12.5% Average -21.2% Source: Various companies

According to data from Bloomberg, global E&P spending peaked at USD314bn in 2013 and is expected by industry analysts to decline by about 14% to USD269bn in 2016. Major oil companies have already announced double-digit capex cuts in 2015 vs. single-digit cuts in 2014, with the possibility of such cuts carrying into 2016 and 2017, if oil prices show no sign of improvement. Many of the oil companies said they are prepared for an average Brent price of USD60/bbl for the next 3 years. In our view, the end result would possibly be the O&G industry’s biggest round of capex cuts in real terms since 1986.

We believe that such cuts are likely to have an instant impact on the MODU and oil services markets, driving demand lower for these markets while translating to a supply correction only in 3-4 years as exploration projects/capex are not immediately production enhancing.

Sector oversupply a major issue Oil prices and E&P spending recovery might be precursors to an industry-wide upturn, but sector fundamentals remain a pertinent factor for sustained business recovery, in our view. The buoyant MODU market from 2009-14 has been a key demand driver for oil services assets. With the collapse of oil prices and consequently lower E&P spending, demand for MODUs has dropped drastically just as increasing supply from new-building backlog is getting delivered. The oil services market paints a similar picture, with 5 years of overbuilding in a triple-digit oil-price era that lasted 4 consecutive years now translating to a massive oversupply of oil services assets such as OSVs.

The result has been significantly lower utilisation and day-rates for both the MODUs and OSVs markets, which will likely witness further deterioration unless major efforts are skewed towards addressing the oversupply situation for these asset classes, in our view.

Companies within the oil services sector are thus unlikely to witness major improvements in their earnings profile until the supply-demand situation reverts to parity via the removal of aged assets from the supply pool. However, such efforts cannot be achieved in a matter of months and the oversupply situation could take 3-5 years to reverse, in our view. A protracted downturn in such a situation would result in many oil services companies likely

Singapore Oil Services Sector: 21 September 2015

facing financial difficulties, with banks pulling out their lines just when credit is most needed.

Our Negative view on the Singapore oil services sector is further substantiated by the analysis of both the MODU and the various oil services markets (OSVs, sub-sea and liftboat), where we expect lower utilisation and day-rates in some of these segments to put pressure on oil services companies’ earnings.

Rig front not looking any rosier Oversupply of MODUs with declining utilisation On paper, the increasing number of global MODUs seems supportive of the OSV market. However, utilisation rates within the MODU market paint a different picture, with both the jack-ups and floaters segments witnessing declining utilisation as demand falters amid lower E&P activities.

Utilisation rates of MODUs 110%

100%

90%

80%

70%

60%

50% 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Jack ups Semi-subs Drill ships

Source: Clarksons Research, Daiwa forecasts

According to data from Clarksons Research, MODU supply is expected to increase by 8- 9% annually in 2015-16, which will likely aggravate the demand-supply imbalance and worsen overall fleet utilisation in the short term. We expect utilisation rates for MODUs in 2016 to be driven even lower than 2009-10 levels due to the imbalance in the supply- demand metric persisting for at least 2-3 years until excess supply is absorbed by recovering demand. We believe that the hardest-hit asset could be drill ships servicing the deepwater arena. According to a study by Wood Mackenzie, an estimated 20bn boe of reserves worth USD200bn have been pushed back. More than 50% of the deferrals identified are for deepwater projects.

Deferred project reserves by resource theme (bn boe) Onshore 1.1

Shallow Water 2.6

Deep/Ultra deep 10.6 Oil Sands 5.6

Source: Wood Mackenzie

With 8 and 15 units expected to be delivered in 2015 and 2016, according to data from Clarksons Research, respectively (accounting for 18% of the global drillship existing fleet), we could see overall utilisation for this category dropping to less than 70% (last seen during the GFC period), as demand dwindles amid a rising supply environment.

Singapore Oil Services Sector: 21 September 2015

In an Upstream news report dated 28 August 2015, it was mentioned that a huge fleet of more than 30 deepwater drill ships and semi-subs has been offered to India’s state-owned Oil & Natural Gas Corporation (ONGC) to fill 2 rig tenders involving the charter of 5 deepwater drilling rigs. At least 17 drilling contractors are vying for these 2 tenders and we estimate that such aggressive bidding by contractors will likely lead to rock-bottom day rates.

Global MODU fleet 700

600

500

400

300

200

100

0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Jack ups Semi-subs Drill ships

Source: Clarksons Research

Transocean Ltd [Not rated], the world’s largest offshore rig owner, expects to see the largest number of floating-rig contract expirations by end-2016 (14 out of 20 drillships not in active employment by end-2016), according to its fleet status report. The company has also started to warm-stack many of its 15-17-year-old drill ships due to poor demand.

Transocean: stacked/idle rigs Rig name Rig type Year entered Service/refurbished Rig status Discoverer Spirit Drillship 2000 Stacked GSF Jack Ryan Drillship 2000 Stacked Deepwater Discovery Drillship 2000 Stacked Deepwater Pathfinder Drillship 1998 Stacked GSF C.R. Luigs Drillship 2000 Stacked GSF Galaxy III Jack up 1999 Stacked GSF Monarch Jack up 1986 Stacked Deepwater Frontier Drillship 1999 Idle Discoverer Enterprise Drillship 1999 Idle Henry Goodrich Semi 1985/2007 Idle Sedco Energy Semi 2001 Idle M.G. Hulme, Jr. Semi 1983/1996 Idle Transocean Marianas Semi 1979/1998 Idle Transocean Spitsbergen Semi 2010 Idle

Source: Transocean

The above examples have illustrated a real and pertinent issue within the MODU market, which is in a depressed state currently. We expect uncommitted newbuild rig supply to worsen the utilisation rates of rig supply in the coming 1-2 years.

Uncommitted newbuild rig supply to worsen utilisation According to data from IHS Petrodata and Clarksons Capital Markets, uncommitted floaters currently account for about 41% of total floater assets under construction globally. These floaters were placed in anticipation of the oil companies embarking on a larger number of deepwater exploration activities, when the oil price was over USD100/bbl. But these deepwater activities never happened as the drastic fall in the oil price triggered massive cuts in exploration work to conserve capital.

Singapore Oil Services Sector: 21 September 2015

Floating rig newbuild delivery schedule 30

0 2015E 2016E 2017E 2018E 2019E 2020E Committed Uncommitted Brazilian

Source: IHS Petrodata, Clarksons Research, Capital Markets

The jack-up segment paints an even more sombre picture, with an estimated 90% of rigs scheduled for delivery in 2018 being uncommitted at present.

Jack-up newbuild delivery schedule 70

0 2015E 2016E 2017E 2018E Committed Uncommitted

Source: IHS Petrodata, Clarksons Research, Capital Markets

The influx of MODU units without any committed jobs serve to reduce overall utilisation rates and put downward pressure on day-rates, which has been on a downtrend since peaking in 2012 for the floaters segment and 2013 for the jack-ups segment. Our expectation is for MODU day-rates to trend lower in 2015-16, in line with falling utilisation.

MODU historical day-rates (USD’000s) 700

600

500

400

300

200

100

0 2010 2011 2012 2013 2014 2015E 2016E Jack-ups Floaters

Source: Clarksons Research

In the short term, the MODU market will undoubtedly face rough times as rig demand underwhelms initial market expectations of increased drilling activities. To bring asset supply-demand back to parity, we view a substantial removal (through cold-stacking or scrapping) of MODUs as a necessity for the next 1-3 years, starting with aged units, which are no longer deemed competitive in today’s climate.

Singapore Oil Services Sector: 21 September 2015

Global stacked rigs

Ready Stacked 164

Cold Stacked 73

Source: Riglogix

According to data from Riglogix, there are currently 164 rigs being ready-stacked and 73 rigs being cold-stacked globally. More jack-ups have been cold stacked in the US due to relative fleet age and market conditions, while in Asia, easy access to shipyards makes its convenient for owners to idle rigs while they market these assets for work.

Scrapping of aged MODUs should accelerate Age profile of MODU units

No of units No of units > 30 years < 30 years 44.9% 55.1%

Source: Clarksons Research

As seen from the above pie chart, about 45% of existing MODUs globally are have been in operation for over 30 years and are likely to be scrapped in the coming 5-10 years. Large drillers, such as Transocean and Diamond Offshore, have seen increased attrition activity of older low-specification units, with many unable to secure a contract in today’s weak demand environment. This selective behaviour emphasises the current market situation, where supply growth outpaces demand and is expected by industry analysts to result in further demolition pressure on low-spec units.

Demolitions/Removals by MODU types 30

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD2015 Jack ups Semi-subs Drill ships

Source: Clarksons Research

Singapore Oil Services Sector: 21 September 2015

The demolition of MODUs has picked up in 2015, with 40 units being demolished YTD (vs.15 units for the past 7 years), mainly in the semi-sub category. According to Rystad Energy, the past-10-year gross utilisation of floaters was 83%. Applying this historical utilisation rate to expected demand for 2015-17, we think there will be a need to retire around 88 units in total over the next 3 years to balance out supply and demand. Some 22 floater units have already been retired in 2015 YTD, but an additional 27 units would need to be retired to balance the market at an 83% gross utilisation level, which would result in a record high level of 49 units retired in a single year. Similarly, an additional 36 floater units need to be retired in 2016 to balance out the demand-supply ratio.

Floater retirement needed to balance the 83% gross utilisation rate 60

40 27 30

20 36 10 22 3 0 2015E 2016E 2017E YTD retirements Additional retirements

Source: Rystad Energy RigCube, Clarksons Research, RigLogix

The active removal of aged assets results in operational efficiency through cost reduction. Concurrently, such actions also improve the overall supply-demand balance within the industry, in our view.

OSV attrition not catching up with MODU attrition Comparatively, owners of OSVs have not been as aggressively retiring older vessels as have owners of MODUs, with 14 units of AHTS and 2 units of PSVs being demolished YTD, according to data from Clarksons Research. The OSV/active rig ratio, currently at 5.17x (a 5-year high), looks set to trend even higher as demolitions for MODUs outpace those of OSVs, keeping a lid on a sustainable utilisation recovery within the OSV market. We provide further insights on the OSV-to-rig ratio in the segments below.

OSV growth vs. MODU growth 12%

10%

0% 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

OSV fleet growth (%) MODU fleet growth (%)

Source: Clarksons Research

Growth in MODU units has generally been supportive of OSV demand, and fleet growth rates for both these asset classes have trended in line for the past 8-9 years. While OSV fleet growth is expected to peak this year at 9.7%, MODU growth will likely taper off only in 2016, according to data from Clarksons Research. While a substantial E&P spending reduction has already translated into a demand correction for MODUs and OSVs alike, additional units coming on-stream in the next 2 years will likely serve to prolong the existing downturn within these markets.

Singapore Oil Services Sector: 21 September 2015

Weak demand, ample supply in the OSV market OSV growth needs to be curbed, in line with the reduction in MODUs Both the global AHTS and PSV fleets have witnessed significant growth over the past decade, expanding at CAGRs of 7.2% and 7.4%, respectively. This is slightly higher than that of MODU fleets, which expanded at a CAGR of 5.4% over 2006-14. Despite current industry weakness with poor MODU newbuilds (down 90% YoY) translating into a similar reduction in OSV newbuilds (down 87% YoY), overall OSV supply is still expected by Clarksons to exhibit growth through 2016, a result of previous overbuilding exacerbating the current deteriorating fundamentals. In our view, an even more drastic reduction in OSV ordering is required to bring supply-demand one step closer to parity.

MODU vs. No. OSV newbuild contracts (LHS); RHS is the OSV/MODU multiple 600 7.9 500 7.7 7.5 400 7.3 300 7.1 200 6.9 6.7 100 6.5 0 6.3 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD2015 MODU contracts OSV contracts Average OSV/MODU (x)

Source: Clarksons Research

Based on past 10-year data from Clarksons Research, 6.6 OSV newbuilds are contracted for each MODU newbuild on average. The current ratio of 12.0x indicates potential over- ordering of OSVs. Newbuild orders for MODUs will likely dry up in the next 1-2 years, mainly a result of falling demand. Newbuild prices of MODUs have been sticky over the past year relative to the fall in the oil price, given robust rigbuilders’ backlogs, whereby these yards have no incentive to cut pricing at the moment. The same cannot be said for the OSV market, which could attract speculators to enter once again if newbuild prices decline by a further 20-30%.

Oversupply of OSVs in a weak demand environment AHTS fleet growth (no. of vessels) 3,500 16% 3,000 14% 2,500 12% 10% 2,000 8% 1,500 6% 1,000 4% 500 2%

0 0%

2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2015E 2016E Fleet YoY growth (%)

Source: Clarksons Research

AHTS vessels remain on a growth trajectory, albeit at a slower pace after a rapid period of growth from 2008-10. The large AHTS vessel category currently has the highest order backlog as a percentage of existing fleet size (among different sized AHTS vessels). This is partially the result of an upsizing trend where vessels are being constructed to serve the rigours of distant-from-shore, deepwater supply duties which did not exist in previous decades.

Singapore Oil Services Sector: 21 September 2015

Global AHTS: existing fleet vs. order backlog (no. of vessels) PSV fleet growth (no. of vessels) 1,600 18% 3,000 16% 1,400 16% 14% 2,500 14% 1,200 12% 12% 1,000 2,000 10% 10% 800 8% 1,500 8% 600 6% 6% 400 1,000 4% 4% 200 2% 500 2% 0 0% Very Large > Large 12-16K Medium 8-12K Small 4-8K Very Small < 0 0%

16K bhp bhp bhp bhp 4K bhp

2010 2012 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2014 Existing fleet Backlog % of fleet 2016E Fleet YoY growth (%)

Source: Clarksons Research Source: Clarksons Research

While fleet growth within the AHTS category peaked in 2008, PSV vessel growth is expected by Clarksons to peak this year at around 14%, with the bulk of growth in the very large (>4K dwt) category, again the result of vessel upsizing to support the deepwater industry. New supply of large-sized PSVs is entering the market at a time when demand for such assets is weak due to reduced deepwater activities. OSV vessel owners will find it extremely challenging to deploy new assets at a day-rate justifiable relative to their construction cost, in our view.

Global PSV fleet growth is expected to decline substantially from its peak in 2015 (at around 14%) to just c.4% in 2016. However, this does not provide much comfort in an extremely oversupplied market with feeble near-term demand. Active removal of aged OSV fleets in lieu of incoming newbuilds is thus necessary to keep a lid on global OSV fleet growth.

Global PSVs: existing fleet vs. order backlog (no. of vessels) 1,200 45% 40% 1,000 35% 800 30% 25% 600 20% 400 15% 10% 200 5% 0 0% Very Large > 4K dwt Large 3-4K dwt Medium 2-3K dwt Small < 2K dwt

Existing fleet Backlog % of fleet

Source: Clarksons Research

Singapore Oil Services Sector: 21 September 2015

Aggressive OSV fleet removal is necessary According to data from Clarksons Research, the percentage of AHTS vessels that are 20 years or older is around 33%, while the percentage for PSVs is 27%. Not surprisingly, a larger number of aged vessels belong to the smaller-size category, which could become obsolete as offshore activities trend towards deeper waters. We will likely witness cold- stacking and demolition activities accelerate in the coming quarters, as owners are forced to retire vessels no longer deemed competitive in an oversupplied environment.

Demolitions and removals trend (no. of vessels) 70 4%

60 3%

50 3%

40 2%

30 2%

20 1%

10 1%

0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD2015 OSV MODU % of OSV Fleet % of MODU fleet

Source: Clarksons Research

Within the AHTS category, the attrition trend points to just a 33% increase, or 14 units YTD in 2015, while that for PSVs was down a surprising 69%, a grand total of 2 units, as of July 2015, according to data from Clarksons Research. Removal of OSVs as a percentage of the global OSV fleet is on average 1pp below that of MODU removal, based on past 10- year data. Without more pro-active removal of vessels on the part of owners, the OSV/rig ratio (active) will remain high relative to the historical average, capping upside reversions for both OSV utilisation and day-rates.

Too many OSVs chasing Mobile offshore drilling units (MODUs) According to data from IHS-Petrodata and Clarksons Research, the OSV/rig ratio (active) was the lowest in July 2008, which represents the past-10-year peak, while the previous trough was registered in January 2011, when the ratio was at the highest it had been for 10 years, at 4.81x. The current ratio of 5.17x, based on our estimates, already exceeds the previous trough as a result of overbuilding. As seen from the table below, the ratio reversed a declining trend after bottoming at 4.01x in early 2014.

If we were to account for the removal of aged assets for both OSVs (vessels more than 20 years old) and rigs (rigs more than 30 years old), the numbers paint a somewhat different picture, with the OSV/rig ratio (for rigs that are less than 30 years old) showing an increase since January 2011, implying that the fundamentals of the OSV market remain weak, contrary to market belief of a turnaround since 2011.

OSV/rig ratio Jan-11 Jan-12 Jan-13 Jan-14 YTD 2015 Active Working Rigs 515 588 690 744 637 Rigs < 30 years old 784 683 622 563 565 Rigs Under Construction 140 174 193 228 203 OSV Global Population 2667 2864 3105 3311 3698 OSV's Under Construction 481 692 629 584 645 OSV/Rig Ratio (Active)* 4.81 4.67 4.23 4.01 5.17 OSV/Rig Ratio (< 30 years) 3.41 4.15 4.58 4.92 5.65 Source: Clarksons Research, Daiwa estimates Note: *OSV/Rig Ratio (Active): Using all active working rigs, some in excess of 30 years **OSV/Rig Ratio (<30 years): Only account for rigs less than 30 years in age, assuming those >30 years are scrapped

Assuming an average OSV/rig ratio (for rigs less than 30 years old) of 4.5x based on data from 2011-15, an estimated 887 units of OSV need to be cold-stacked/removed from the market. This would mean having to remove around 54% of vessels aged more than 20

Singapore Oil Services Sector: 21 September 2015

years old, on the assumption of zero newbuilds contracted from hereon. We believe such huge removal numbers cannot be achieved in a single year, given the fragmented nature of the OSV market, with the top-20 OSV owners accounting for only 32% of the global OSV fleet, based on data from Clarksons Research.

According to shipbroker Westshore, owners of some of the worst-hit UK-based assets are reluctant to lay up their tonnage, due to a combination of company culture, ownership and crew nationalities, which has resulted in a decision to ride out the storm. Such actions will just prolong the downturn, in our view.

Selected OSV owners stacked vessels Owner Stack Fleet size % of fleet Tidewater 38 312 12% Bourbon 26 227 11% Seacor Holdings 9 109 8% Gulfmark Offshore 9 76 12% Hornbeck Offshore 18 58 31% Farstad shipping 2 55 4% Source: Various companies

There has, however, been a recent concerted effort by the larger OSV owners to move the supply-demand balance more in their favour by laying up vessels, although conditions have stayed primarily in the charterers’ favour, with spot rates remaining on a downtrend. We believe the stream of vessels heading for layup will pick up as we progress through 2H15, but will still be insufficient to move day-rates higher for the rest of 2015.

Day rates could remain on a downtrend North Sea OSV 1-year time charter rates (USD) North Sea spot average utilisation 70,000 100%

60,000 80%

50,000 60% 40,000 40% 30,000 20% 20,000 0%

10,000

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15

Jun-15 Jan-15

0 Jun-14

Feb-14 Mar-14 Feb-15 Mar-15

Nov-14 Dec-14

Aug-14 Sep-14

May-14 May-15 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Medium PSV Large PSV Large AHTS, 240t BP PSV > 4000 dwt Medium AHTS Large AHTS Source: Clarksons Research Source: Seabrokers

We would not be surprised by still lower OSV utilisation and day-rates in the coming quarters. Already the average 1-year time charter day rates for the Very Large AHTS and Large PSV segments have fallen by around 16% and 22% YoY to average USD39K and USD23K, respectively, for 2015. A further erosion in day-rates can be reasonably expected in our view, with owners struggling to maintain a decent level of fleet utilisation offering day-rates at cash break-even.

Average spot utilisation has been holding steady due to vessel owners making concerted efforts to move the supply-demand balance more in their favour by laying up tonnage in both the AHTS and PSV sectors. High utilisation rates could also be the result of vessel owners’ willingness to compensate in terms of charging a lower day-rate so as to ensure healthy fleet utilisation amid a competitive landscape. However, we believe utilisation rates have to trend lower in the coming quarters with the market being persistently oversupplied, and no demand improvement in sight.

Singapore Oil Services Sector: 21 September 2015

Asset price decline could result in future impairments for OSV owners Large OSV newbuild prices (USD m) Large OSV second-hand prices (USD m) 140 80 120 70 100 60 50 80 40 60 30 40 20 20 10

0 0

Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

Jun-12 Jun-15 Jun-08 Jun-09 Jun-10 Jun-11 Jun-13 Jun-14

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Aug-09 Aug-11 Aug-13 Aug-10 Aug-12 Aug-14

Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15

Large AHTS, 240t BP PSV > 4000 dwt Large AHTS, 200t BP PSV > 4000 dwt

Source: Clarksons Research Source: Clarksons Research

According to data from Clarksons Research, both OSV newbuild and second-hand prices have seen drastic reductions, with the OSV newbuilding index down 16% YoY and the OSV second-hand index down 27% YoY at end-June 2015. If our assumption for oil prices is correct, 2014 could just be the start of an asset deflationary cycle for the OSV market. A further 20% asset impairment charge could result in some weaker OSV owners being insolvent, in our view. We prefer to position ourselves in counters that can withstand a larger asset deflationary drawdown, such as PACRA. We provide a more detailed analysis of its asset valuation in the valuation segment.

OSV owners who ordered vessels during the peak in mid-2014 could see a close to 20% mark-to-market reduction in asset value even prior to taking delivery of these assets. In the event that these vessels are unable to secure any jobs, impairments would be necessary to bring asset prices on their books closer to market values.

Many of the listed OSV owners are trading currently at large discounts to their stated book values, due we believe to the market’s distrust of their inflated book values in today’s asset deflationary context. The OSV owners under our coverage, such as PACRA, are currently trading at a 70% discount to reported book value. After adjusting PACRA’s assets closer to what we believe could be the assets’ true market value, we derive a value still in excess of 100% vs. its market capitalisation. Although the company’s cost advantage of constructing vessels at around a 20% discount to market prices (in 2013-14) has now been eroded, we believe these vessels remain relevant to clients’ needs and should be one of the first to be gainfully employed upon an industry recovery.

Selected OSV owners PBR vs. fleet age Owner Reported P/B Average vessel fleet age PBR*Fleet age Tidewater 0.3 14.2 4.3 Bourbon 0.55 6.5 3.6 Seacor Holdings 0.81 11.9 9.6 Gulfmark Offshore 0.18 9.6 1.7 Hornbeck Offshore 0.42 9.7 4.1 Pacific Radiance 0.4 4.8 1.9 Source: Clarksons Research, various companies

As seen from the table above, PACRA has one of the lowest average fleet ages vs. its larger peers. The global average fleet age currently stands at 15.6 years. Though it is not the cheapest on a reported PBR basis, after adjusting for vessel fleet age (multiply PBR to average fleet age), we derive the lowest multiple of 1.4, with only Gulfmark Offshore coming close at 2.2, which could possibly indicate value in PACRA currently vs. international peers.

However, we remain cautious on its current capex commitments of up to USD220m at a time when cash flow through vessel sales is drying up due to a weak second-hand market. We reiterate our Hold (3) rating and lower our 12-month target price to SGD0.32 (from

Singapore Oil Services Sector: 21 September 2015

SGD 40) (see valuation section for further details) for PACRA, and would look to upgrade the counter when the following key risks are adequately addressed by management:

 Better cost management to ensure profitability even in adverse conditions. We expect utilisation rates to remain relatively subdued in the coming quarters but an improvement in margins could indicate success in terms of cost control.  Managing net gearing substantially below 1.0x mitigates credit risk. We do not foresee any short-term credit issues. Given that the earliest repayment of its bonds is only due in August 2018. However, the company’s interest coverage ratio is only forecast at 2.2x, which poses a risk in terms of debt obligation if operating conditions do not improve for the better.  Lower capex commitment reducing cash flow constraint risk. Given current weakness in the charter market, a deferment of existing newbuild deliveries would help reduce short-term capex commitments and improve overall cash flow status within the company for working capital requirements.

Recent sales activities have also faltered OSV sales activity (no of vessels) 70 61 60 54 50 47 50 44 40 36 38 38 40 32 28 30 25 25 21 20 19 16 20 13 10 0 2007 2008 2009 2010 2011 2012 2013 2014 YTD2015 AHTS PSV

Source: Clarksons Research

Sales activity has also been relatively subdued with a total of 32 OSV sales in 2015 as of 30 July 2015, down 29% on an annualised basis. Sales activities could remain weak for the rest of 2H15, possibly trending into 2016, in our view. Companies depending on the sale of assets to generate cash flow could be significantly impacted.

PACRA has historically generated around 50% (based on the past 4-year average) of its earnings through the sale of second-hand vessels. The reduction in cash flow from this segment of its business could present short-term cash flow constraints, taking into consideration its substantial USD220m capex commitment for the next 2 years. Management will need to provide assurances to the market that in an absence in the sale of vessels, the company remains in a comfortable position to generate sufficient cash flow for its operating requirements.

Improvement in fundamentals key to a long-term uptrend We mentioned previously that oil prices, E&P spending and the MODU markets are possible leading indicators for the OSV market. Currently, there are no indicative signs of an impending turnaround. Given that the OSV market itself is fundamentally weak due to an oversupply issue, a concerted effort needs to be taken by all OSV asset owners to scrap aged vessels and alleviate excess supply pressure on both utilisation and day-rates. Short-term pain has to be taken in lieu of better longer-term prospects, in our view.

Singapore Oil Services Sector: 21 September 2015

Calm beneath the sea? Subsea installation and maintenance more insulated The classic assumption is that the market for subsea installation and maintenance tends to be more insulated from the collapse in oil prices, given that installation projects generally have long lead times while maintenance projects are necessary to ensure higher levels of production, a critical requirement in today’s low oil price environment. However, with oil companies announcing major cuts in short-term investments, it seems likely that the potentially positive longer-term trend will be preceded by short-term challenges.

CSV supply growth (ship shaped, DP II+, LOA > 90m) (no. of vessels) 400 350 300 250 200 150 100 50 0 < 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

Source: Pareto Securities, IHS, Clarksons Research

Projects with high capital outlay and break-even prices will likely be the first to be deferred. These are generally large subsea infrastructure construction projects catering to the deepwater arena. Short-term headwinds within this category due to the demand reduction are further compounded by a higher supply of Construction Supply Vessels (CSV), where Clarksons expects fleet growth to average 12% in 2015, higher than the past-10-year average of 10% fleet growth.

On the other hand, the inspection, repair and maintenance (IRM) market would be relatively more immune to oil price volatility, given that opex still needs to be carried out to improve field recovery and cannot be indefinitely deferred without affecting the integrity of offshore infrastructure. The combination of aging assets and increasing technology development could thus make for a fairly quick and healthy recovery for the IRM market.

According to Douglas-Westwood, Asia and North America will dominate the global IRM requirements, accounting for 39% of projected expenditure from 2015-19. The former in particular is becoming an increasingly attractive market to international contractors as local operators turn to more modern DSV/MSV assets to improve operational efficiency.

Global subsea spending (2015-19E) Subsea vessels: supply and demand

Others, 2% 60% 25%

40% 15% Construction, 20% 19% 5% 0% Field (5%) Development, (20%) 40% (40%) (15%)

IRM, 39%

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15

Subsea backlog % YoY (LHS) Subsea support fleet % YoY (RHS) Subsea construction fleet % YoY (RHS) Source: Douglas Westwood Source: Clarksons Research

Singapore Oil Services Sector: 21 September 2015

Within our universe of stocks with exposure to the subsea market, we prefer PACRA vs. Ezra due to the former’s IRM assets, which stand to benefit from maintenance-related subsea works, where fundamentals remain robust.

According to Clarksons Research, 15% of installed subsea wells were over 15 years of age a decade ago: today 35% are, and the volume of such “ageing” subsea structures has been growing at 20% per year. This is a supportive trend for the longer-term future of the IRM fleet.

Conversely, Ezra’s fleet of subsea construction vessels is more dependent on the fortunes of oil companies’ willingness to spend on capex. Subsea orders for this category of construction-related work have generally been robust, showing YoY growth since 2H10. However, growth has dropped sharply since 1Q15 with the book-to-bill ratio expected to be less than 1.0x in 2015, according to Clarksons.

Robust subsea orderbook but margins likely to come under pressure The 3 major players in the Subsea Umbilicals, Risers & Flowlines (SURF) arena are the likes of Subsea 7, Saipem and Technip. These companies have enjoyed historical high order wins in the past 3 years, hitting a record high of around USD25bn in 2013. Growth has since tapered off and we will likely witness a book-to-bill ratio of less than 1.0x in 2015, as these companies are not immune to capex cuts and delays in project activity by oil companies.

Big-3 SURF players order intake (USDm) and book-to-bill (x) Big 3 SURFs: revenue (USDm) vs. EBITDA margin (%)

30,000 1.6 45,000 18% 1.4 40,000 16% 25,000 35,000 14% 1.2 20,000 30,000 12% 1 25,000 10% 15,000 0.8 20,000 8% 0.6 15,000 6% 10,000 10,000 4% 0.4 5,000 5,000 2% 0.2 0 0%

0 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016E 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2015E

Technip Subsea 7 Saipem BtB (RHS) Revenue EBITDA Margin (%) - RHS

Source: Pareto Research Source: Bloomberg

Despite revenue growth since 2011, EBITDA margins for the Big 3 SURF players was on a decline from 2011-14 due to the execution of low-margin projects awarded in previous years.

According to Bloomberg-consensus forecasts, margins will likely improve in the current and following year as high-margin projects secured in 2013-14 during peak oil prices should be recognised. Revenue, however, should start dipping given lower order intake in 2014-15.

We do see the overall subsea segment being more resilient to the oil price decline, but would caution against rapidly declining margins from 2017 onwards as competition for jobs intensifies among the major subsea players. Ezra’s large order backlog of around USD2bn will likely wither down in the coming years, given our expectations of a book-to-bill ratio of less than 1.0x. A more concerning issue would be its razor thin net margin of 2% for its subsea division, which is unlikely to show much improvement for the next 2-3 years due to low-margin projects secured hereon.

Singapore Oil Services Sector: 21 September 2015

Lifting expectations in a depressed offshore market Focused on increasing productivity Oil and gas capex on exploratory works has already seen substantial cuts with oil companies’ preference for capital conservation vs. increasing reserves. However, operations in the rest of the oilfield cycle should continue, with an added focus on increasing the productivity level of each oil-producing well. This will likely involve the usage of liftboats for the maintenance of existing oilfields.

Liftboats are self-propelled, self-elevating offshore working platforms used for the maintenance of production platforms. Demand for liftboats has generally remained resilient over the past year despite the fall-off in oil prices, unlike the sharp decline in utilisation rates witnessed for offshore drilling rigs and offshore support vessels. These assets are utilised in ageing shallow-water oil fields with the purpose of enhancing production levels.

Fixed platform deployment 3,000

2,500

2,000

1,500

1,000

500

0 North America Latin America West Africa NW Europe Mediterranean Middle East Asia Pacific 2012 2013 2014 YTD 2015

Source: Clarksons Research

The usage of liftboats has generally been a new concept in Asia with the liftboat-to- platform ratio being much lower than regions in North America. According to Triyards [Not rated], a liftboat manufacturer listed on the SGX, 1 liftboat in North America is used to service 14 offshore platforms, while in Southeast Asia, the Middle East and West Africa, that ratio is 1:60. Hence, we do see scope for greater liftboat adoption, in particularly within Southeast Asia, where the usage of fixed platforms for production witnessed the highest CAGR compared to all other regions, at 4.4% vs. 1.5% from 2012-15.

Advantages of liftboats over jack-ups and tender barges Liftboats vs. alternatives Liftboats Tender barges Jackup rigs Description Self-elevating, self-propelled vessels to Provide accommodation and Exploration drilling and well services support various IRM activities, EOR- construction support, EOR-related support related services services, IRM and subsea operations Scope of activities Accommodation Yes Yes No Construction Support Yes Yes No Drilling No No Yes EOR Yes Yes No Maintenance Support Yes Yes No Well Services Yes Yes Yes Day Rates (USD) 40-60K 30-50K 80-180K OSV Day Rates (USD) Self-propelled 4-10K 15-30K Potential Competition High Medium Low Source: Douglas Westwood, Daiwa estimates, Various Companies

Jack-ups have been mooted as a possible substitute for liftboats, especially in today’s environment with ageing jack-ups no longer being deemed competitive; hence the chance of them remaining as a drilling asset has become remote. Many of these units are currently being cold-stacked or are scheduled for scrapping by drilling contractors in the coming quarters.

Singapore Oil Services Sector: 21 September 2015

However, we do not see jack-ups as a viable replacement, due to the following advantages that liftboats have over the former:

Efficiency of liftboats due to self-elevating and self-propelling capabilities: A liftboat has the ability to get on and off a location significantly faster, removing the need for tugs such as AHTS to move it. In addition, its jacking/self-elevating system is far more robust than that of an old jack-up, given that a liftboat’s key feature is its jacking system, whereas a jack-up is not constructed with an efficient jacking system in mind.

Greater availability of deck space: The increased deck space offers such assets the ability to carry more equipment such as coiled tubing or chemicals for well intervention work. On the other hand, the presence of a drilling derrick on a jack-up reduces deck space available for such maintenance and well-intervention works.

Larger crane capacity required for maintenance purposes: Jack-ups also may not have the necessary crane capacity for engaging in larger scale lifting works, a key requirement in most maintenance-related works.

Hence, the use of an aged jack-up is not a cost-efficient replacement for a liftboat in today’s context. Moreover, to refurbish an aged jack-up to bring the asset up to specification and allow it to take on the role of a liftboat requires an estimated USD20-30m refurbishment cost, an amount we believe rig owners are not willing to spend in today’s context without the assurance of a long-term charter contract.

A tender barge is often seen as a substitute for a liftboat for maintenance work. However, a tender barge does not have self-propelling ability. In addition, it also requires an AHTS to anchor the barge alongside a platform during maintenance work. This generally incurs a higher cost due to longer time needed to complete a task vs. deployment using a liftboat.

Main risk: low barriers to entry The attractiveness of the liftboat industry from both a profitability and utilisation standpoint (Ezion achieved 99% utilisation according to its 2Q15 results, excluding units on downtime due to maintenance and repairs) amid weak oil prices has resulted in more units of liftboats being built, some on a speculative basis. Companies such as ASL Marine (Not rated), Falcon Energy (Not rated) and Atlantic Navigation (Not rated) have already indicated their intention to diversify their companies’ product offerings to provide liftboat services.

Major liftboat operators (no. of vessels)

Hercules Offshore EBI Elevating Boats Ezion Holdings Seacor Liftboats Offshore Marine Contractors Gulf Marine Services Offshore Liftboats Trinity Liftboat Services Montco Offshore

0 5 10 15 20 25 30

Source: Various companies

We believe the barriers to entry are relatively low for existing operators of offshore assets to penetrate this relatively underserved market, given the low capital cost required (USD60-90m vs. USD180-220m for a jack-up) and plenty of yard availability to build a 3rd party liftboat design. The influx of new units from 2016 could result in depressed charter rates and lower utilisation rates for existing liftboat operators such as Ezion.

Singapore Oil Services Sector: 21 September 2015

However, we believe Ezion remains one of the pioneers in the operation of liftboats in the region, and its first-mover advantage and strong track record have not gone unnoticed by the likes of major oil companies, given their strong order backlogs and ability to re-contract recently expired charters as a testament to the resilience of its business model.

The company also has a proprietary training centre in its Singapore HQ to provide its crew with the necessary training to ensure correct handling of equipment on board a vessel.

Survival of the fittest Cost management necessary for PACRA to survive PACRA’s share price has seen a significant correction of 80% since peaking at SGD1.50 in August 2014. The company has not been spared the O&G carnage despite having one of the youngest fleets of OSVs among its international peers.

Top OSV operators’ fleets (no. of vessels)

Pacific Radiance Deep Sea Supply Maridive & Oil Service Swiber Holdings Pacific Carriers DOF Management MMA Offshore Zamil Offshore Harvey Gulf International Topaz Energy Farstad Shipping China Rescue &… Hornbeck Offshore Maersk Supply Service Gulfmark Offshore John Swire & Sons CNOOC Seacor Holdings Edison Chouest Bourbon Tidewater Marine 0 50 100 150 200 250 300 350

Source: Clarksons Research

We believe PACRA could be one of the earliest contenders for an earnings recovery, triggering a share-price rally. Its young fleet of technically relevant vessels should have no issues finding employment in the early stages of an industry recovery, while peers could still be struggling to deploy their aged vessels amidst an industry still fraught with oversupply issues.

Singapore Oil Services Sector: 21 September 2015

Average fleet age (years)

Maridive & Oil Service CNOOC China Rescue & Salvage Tidewater Marine Maersk Supply Service Seacor Holdings Farstad Shipping Hornbeck Offshore DOF Management Gulfmark Offshore Edison Chouest John Swire & Sons MMA Offshore Zamil Offshore Topaz Energy Bourbon Deep Sea Supply Pacific Carriers Harvey Gulf International Pacific Radiance Swiber Holdings

0 2 4 6 8 10 12 14 16 18 20 Source: Clarksons Research

We see an aggressive cost-cutting approach as critical in ensuring its survivability in a downturn that could turn out to be a protracted one, with oil prices still being depressed. Besides reducing administrative expenses, which have already flowed through based on its 2Q15 financial results, we believe the company has to do more to reduce direct costs in the form of lower crew expenses and the upkeep of un-chartered vessels.

PACRA: wholly owned fleet (no. of vessels) 80 74 68 70 64 65 58 58 60 49 50

0 2010 2011 2012 2013 2014 2015E 2016E

Source: Company, Daiwa forecasts Note: grey bars denote Daiwa forecasts

The company has an existing newbuild programme for the delivery of 5 vessels in 2H15 and an additional 6 vessels in 2016, which might not be able to find any charters. In this instance, the company would incur depreciation, interest costs and warm-stacking expenses associated with taking delivery of these assets with no revenue generation, resulting in lower margins. A simple solution to address these cost issues would be to defer the deliveries of the assets with its China yards until work can be contracted for these vessels. Such an initiative would also reduce near-term capex commitment, given that cash conservation should rank among the highest priority in today’s environment, in our view. It is also critical to note that the company is no longer generating as much cash flow through the sale of second-hand vessels. Sale of vessels on average generated 50% of group earnings in the past 4 years. The slowdown in vessel sales will likely have an impact on near-term cash flow, further increasing the importance of cash conservation.

In our view, PACRA, at its current share price of SGD0.335, presents a good margin of safety based on asset valuation (see Valuation segment), with the company trading currently at only a 0.4x P/B and a 0.52x on R/RNAV (we revalue its vessels reported on its book closer to market valuation, using data from Clarksons Research on recent transacted vessel activities).

Singapore Oil Services Sector: 21 September 2015

PACRA: gross profit margin PACRA: operating profit margin 50% 70% 65.1% 45% 44.3% 60% 40% 41.2% 40.2% 35.9% 50% 35% 34.6% 32.7% 46.4% 30% 41.3% 27.9% 40% 25% 29.2% 31.8% 32.3% 21.1% 30% 20% 26.2% 15% 20% 22.2% 12.8% 10% 8.8% 10% 6.0% 5% 4.5% 0% 0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company Source: Company

We, however, continue to maintain our Hold (3) rating on the stock, as we believe it will take longer than 12 months to see a significant rerating of its share price, given there are no signs of a margin improvement as yet based on its 2Q15 results. Its high gearing level could be cause for concern if utilisation and day-rates for assets remain depressed for a protracted period. This could force the company to sell its assets at less than market value to pare down debt.

We would revisit our recommendation on the stock if cost-cutting measures translate into better gross margins, which we believe could occur as early as 1H16.

Ezra is in a weak position to wrestle market share Ezra: key fleet of subsea vessels Vessel Name Description Lewek Constellation Ice-class subsea multi-lay vessel with heavy lift Lewek Connector Deepwater construction/flexible pipelay Lewek Express Reeled pipelay vessel Lewek Champion DP 2/rigid pipelay/heavy lift and accommodation Lewek Centurion S-Lay deepwater pipelay vessel Lewek Falcon Multifunctional anchor handling tug and SURF construction vessel Lewek Inspector Inspector, Maintenance and Repair/DP 2 Lewek Crusader Heavy lifting/flex lay and accommodation Source: Company

For the past few years, Ezra has beefed up its subsea capabilities with the intention of penetrating the subsea construction market historically dominated by the Big-3 players. Its flagship vessel, the Lewek Constellation, is the latest addition to its fleet of pipelay and construction vessels aimed at entering the subsea construction market.

Major subsea players: net debt/equity (%; LHS) vs. 10-year Major subsea players: 3-year cumulated share-price average free cash flow (USDm; RHS) performances 2.0 400 60% 40% 300 1.5 20% 200 0% (20%) 1.0 100 (40%) 0.5 0 (60%) (80%) -100 0.0 (100%) -200

-0.5 -300

22/10/2012 22/12/2012 22/02/2013 22/04/2013 22/06/2013 22/08/2013 22/10/2013 22/12/2013 22/02/2014 22/04/2014 22/06/2014 22/08/2014 22/10/2014 22/12/2014 22/02/2015 22/04/2015 22/06/2015 Saipem Subsea 7 Technip Ezra 22/08/2012

Net Debt/equity Ave 10-year free cash flow (RHS) Ezra Saipem Subsea 7 Technip

Source: Bloomberg Source: Bloomberg

Singapore Oil Services Sector: 21 September 2015

Despite a robust subsea order backlog, Ezra has suffered a razor thin net profit margin of around just 2% from 2011-14 and negative free cash flow for the past 10 years. Gearing levels are also significantly higher than those of its international peers, with the exception of Italy’s Saipem. With competition intensifying, the company has little headroom to accommodate lower pricing for its projects, in our view.

The share prices of Ezra, Saipem, Subsea 7 and Technip have corrected by 82%, 80%, 52% and 46%, respectively, over a 3-year horizon (since mid-2012). Not surprisingly, this is in line with the gearing levels and free cash flow generated by these companies. Ezra and Saipem, both which have high levels of gearing and constant negative free cash flow, have been the most heavily sold off. We believe these companies might not have the financial resilience to ride out the current downturn, assuming it turns into a protracted one.

On 27 August 2015, Ezra entered into a binding memorandum of understanding (MOU) with Chiyoda Corporation (Chiyoda) for the latter to invest in Ezra’s subsea services businesses, EMAS AMC, to form EMAS CHIYODA Subsea (JV), a 50:50 joint venture. Chiyoda plans to pay a total of USD180m for a 50% ownership in the JV while Ezra would convert part of its existing inter- company debt owed by EMAS AMC into equity.

We view the above transaction as a win-win situation for both parties: Chiyoda would have acquired an asset-backed business at 65% to Ezra’s reported book value, while the USD180m cash infusion for Ezra would help alleviate its credit concerns and reduce its gearing to 0.8x. The de-consolidation of its subsea business as a result of the above transaction would be the easiest and quickest method to reduce its gearing level, in our view, although we would question the overall transparency of its credit-standing, as debt levels in the subsea business can no longer be easily monitored.

We agree with management that following the Chiyoda deal, Ezra’s credit risk would have been sufficiently mitigated. Ezra will be able to deconsolidate 3rd party debt relating to its subsea business, concurrently using the USD150m cash payment to reduce its own internal gearing to 0.8x. However, if we are to evaluate Ezra from a business operation standpoint, we do not foresee any changes in terms of operational capability in the short term.

We remain negative on Ezra and maintain our Underperform (4) rating on the stock with a new 12-month target price of SGD0.116 (from SGD0.14) (see valuation segment), with our valuation methodology of SOTP-based divisional EV/EBITDA remaining unchanged. We see Ezra at risk of generating razor-thin margins even in a recovering industry, given that both its current and future orders (if any) would likely be low-margin by nature. Gearing levels could turn higher again from current levels if asset impairments need to be taken due to a protracted decline in the industry outlook.

Ezion still the best of the lot Despite having a utilisation rate of close to 100% based on its operational fleet, Ezion’s share price has also been battered in recent months as its earnings have underwhelmed consensus. Its 2Q15 results saw a gross profit margin of 35%, the weakest since 2011, due to downtime on 6 rigs for maintenance and repair work. However, Ezion has demonstrated that demand for its service rigs/liftboats services remain strong, as it has successfully re-contracted 4 out of 5 contracts that are due in 2015. The company currently has 25 delivered rigs and is expected to take delivery of 6 more rigs in 2H15 and another 6 in 2016, bringing its total fleet size to 37 service rigs/liftboats. These rigs have all been contracted on a long-term basis (2-4 years).

We see demand for Ezion’s liftboat assets remaining relatively robust, driven by strong demand for liftboat services at present. However, the influx of newbuild liftboats due for delivery in 2H16-1H17 could affect the supply-demand dynamics of the industry, assuming sentiment toward the O&G arena remains poor.

Singapore Oil Services Sector: 21 September 2015

Ezion: fleet of liftboats and service rigs beginning of the year (No. of vessels) 25 20 20 20 17 16 15 13 12 9 10 5 5 4 5 3 3 1 0 0 2011 2012 2013 2014 2015 2016 2017 Liftboats Service rigs

Source: Company, Daiwa forecasts

Despite the stock trading currently at a 0.6x PBR for 2015E, we acknowledge that its assets could be over-inflated given its aggressive depreciation policy whereby some of its non-current assets are depreciated over a long “useful-life” of up to 25 years. Hence, Ezion’s assets could be substantially over-valued, given that a fair amount of these units are service rigs, where these assets are used mainly for accommodation purposes and are not fully fitted to do the maintenance work of a liftboat.

We believe a better measure to value the company is SOTP, with its main liftboat/service rig division valued using DCF. Our key assumptions call for contracted service rigs to be terminated and scrapped upon the end of the contract period, while liftboats are assumed to have a useful life of 15 years.

Based on our valuation of Ezion (see valuation segment), we estimate the company is worth at least SGD0.94, and its current share price is at a substantial 24% discount to what we deem to be its fair value. We expect the stock to be rerated upon clarity of its earnings strength in the next few quarters. As such, we reiterate our Buy (1) call and lower our 12- month target price to SGD0.94, from SGD1.24. A key risk would be significant downtime on its assets for maintenance and repair purposes as seen from the poorer-than-expected 1H15 results.

Delving deeper into potential credit issues One of the key concerns in most investors’ minds seems to be the survivability of these companies based on their balance sheet strength. We look to provide a brief overview of the individual companies’ credit standings to see if credit and liquidity concerns would be pertinent if the downturn turns out to be a long drawn out one.

Credit ratios vs. cash flow Ezra Ezion Pacra Net debt/equity (x) 1.1 1.0 1.0 Interest Coverage (x) 3.3 8.2 2.2 Free cash flow (2014) - USD m (228.0) (245.0) (146.0) Source: Companies, Daiwa estimates

Pacific Radiance In terms of credit-related issues, PACRA’s net debt/equity would trend towards 1.0x by the end of the year, based on our forecasts, due to the company’s commitment to take delivery of the 5 vessels in 2H15 as it stands. Interest coverage (EBIT/interest) stands at only 2.2x based on 2015E EBIT and interest cost. This is a cause for concern, in our view, and the company might not be able to make its debt obligation if the current bearish situation persists. Cash flow remains negative due to capex commitment (total remaining capex of USD220m, with USD180m funded by debt and USD40m through internal funding) and the lack of second-hand vessel sales. We expect free cash flow to turn positive in 2017 upon completion of its newbuild programme by the end of 2016.

Singapore Oil Services Sector: 21 September 2015

PACRA: senior unsecured 4.3% coupon bond

100 98 96 94 92 90 88 86 84 82 80 11/4/2014 12/4/2014 1/4/2015 2/4/2015 3/4/2015 4/4/2015 5/4/2015 6/4/2015 7/4/2015 8/4/2015 Source: Bloomberg

The repayment of its bond amounting to SGD100m is due in 2018 and the notes are trading currently at 95cts to the dollar with a yield to maturity (YTM) of around 6%.

We are concerned about potential credit issues arising for PACRA in the event that operational conditions do not improve. In a worst-case scenario, the company might have to sell its assets in a depressed market to meet its debt obligations. However, based on a P/RNAV of 0.52x as mentioned earlier, sufficient MOS is present to ensure that shareholders’ value is retained, in our view.

Our Hold (3) rating takes into account the above credit risks. In our opinion, management needs to sufficiently address the above credit-related issues for the share price to recover.

Ezra Ezra recently completed a round of equity raising through a 2-for-1 rights issue, raising around SGD150m to meet debt obligations due. The capital raising resulted in a significant dilution to existing shareholders’ stakes. Its net/debt equity remains elevated at 1.0x (after the rights issue), while interest coverage at 3.3x is also on the low side.

As previously highlighted, the company registered 10 years of negative free cash flow as a result of its growth ambition to be one of the leading players within the subsea construction domain. However, insufficient future order wins would force it to further downsize its asset- base to meet both financial and working capital obligations. The recent sale of its 50% subsea business to Chiyoda should help alleviate short-term working capital requirements, but further illustrates the fact that Ezra is probably not able to manage its subsea division without the financial assistance of a larger entity.

Ezra: senior unsecured 4.875% coupon bond

105

100

4/19/2013 5/19/2013 6/19/2013 7/19/2013 8/19/2013 9/19/2013 1/19/2014 2/19/2014 3/19/2014 4/19/2014 5/19/2014 6/19/2014 7/19/2014 8/19/2014 9/19/2014 1/19/2015 2/19/2015 3/19/2015 4/19/2015 5/19/2015 6/19/2015 7/19/2015 8/19/2015

11/19/2013 12/19/2013 10/19/2014 11/19/2014 12/19/2014 10/19/2013 Source: Bloomberg

Singapore Oil Services Sector: 21 September 2015

Its SGD150m 4.875% coupon bond due in April 2018 has a YTM of 11.6%, which reflects some degree of pessimism with regard to the company’s business operation. It is currently trading at 84cts to the dollar and could trend lower if business prospects do not improve in the coming quarters, in our view, with continual erosion of cash.

We remain concerned about Ezra’s high gearing, low interest coverage and persistent negative free cash flow. Although the stock is trading currently at a 2015E PBR of 0.2x, we are doubtful its book value reflects its true market valuation and believe future impairments will be in order. A 25% reduction in its PPE would result in PBR increasing to 0.4x from 0.2x and net gearing rising to 3.1x from 1.1x.

We reiterate our Underperform (4) rating on the stock and do not expect these credit- related risks to be mitigated in the near future. Given the risk of potential equity erosion from impairment of assets, we believe Ezra’s bondholders are in a more favourable position than its equity holders with regard to downside risk.

Ezion We expect Ezion’s net gearing to be at around 1.0x for 2015 as it continues to take delivery of new assets which have already been contracted and will likely contribute to revenue in the coming quarters. The company’s interest coverage stands at a comfortable 8.2x currently, although we would caution that a fair amount of interest has been capitalised. We estimate the number would be closer to 4.3x based on total amount of interest paid. The company will likely be free cash flow positive at the end of 2016, after all its 37 liftboats/service rigs have been fully delivered.

Ezion: senior unsecured 3.65% coupon bond Ezion: senior unsecured 4.875% coupon bond

101.0 108 106 100.8 104 100.6 102 100.4 100 100.2 98 100.0 96 99.8 94 99.6 92

99.4 90

8/1/2015 8/3/2015 8/5/2015 8/7/2015 8/9/2015

6/2/2015 1/6/2015 8/4/2015

7/30/2015 8/11/2015 8/13/2015 8/15/2015 8/17/2015 8/19/2015 8/21/2015 8/23/2015 8/25/2015

11/4/2014 1/27/2015 2/17/2015 3/10/2015 3/31/2015 4/21/2015 5/12/2015 6/23/2015 7/14/2015 8/25/2015 12/16/2014 11/25/2014 Source: Bloomberg Source: Bloomberg

The nearest debt commitment due is in 2020, which is the SGD120m senior unsecured 3.65% coupon the company recently completed. This bond is trading at a 3.4% YTM currently and is priced slightly above par.

A second SGD150m 4.875% coupon bond is due in June 2021 and that bond is currently trading at 96cts to the dollar with a YTM of 6.5%.

Given its strong order backlog, with free cash flow likely turning positive by end of 2016, Ezion’s credit risk looks manageable to us at current levels. Management has stated in previous analysts briefings that it will be looking to scale down the company’s fleet growth by taking on fewer contracts. Instead more emphasis will be placed on executing on-hand contracts amid the industry downturn.

Summary We acknowledge that credit risks are real among our oil services coverage, with most of the stocks trading at net debt/equity levels of 1.0x currently. Although valuations look compelling for some of these stocks, without fully addressing these credit issues, a rerating would not be in order, in our view. Our Negative rating on the sector partly takes into account these credit-related issues.

Singapore Oil Services Sector: 21 September 2015

We are comfortable with Ezion’s 1.0x gearing level, as it is backed by a solid order backlog with good cash flow visibility. We estimate the company will turn free cash flow positive by the end of 2016 after all its 37 liftboats/service rigs have been fully delivered.

PACRA and Ezra’s net gearing levels of 1.0x and 1.1x, respectively, present greater credit risks as their assets are not fully backed by existing contracts. A prolonged period of low utilisation and day-rates for their assets could see net gearing being elevated further. This would force the companies to embark on an asset sale programme to alleviate credit- related risks.

Singapore Oil Services Sector: 21 September 2015

Valuations and recommendations Ezion: target price of SGD0.94 based on SOTP valuation We derive a new 12-month target price of SGD0.94 (from SGD1.24) for Ezion using an SOTP-based valuation methodology (previously PER) comprising the following major assumptions:

1. Liftboats: We value Ezion’s fleet of 17 liftboats using a DCF method with a WACC of 10.0%. We assume 75% utilisation on time-charter contracts (accounting for downtime) and 90% utilisation on bare-boat contracts at current contracted rates for an estimated useful life of 15 years, and zero residual value.

2. Service rigs: We value Ezion’s fleet of 20 liftboats using a DCF method with a WACC of 10.0%. We assume 75% utilisation on time-charter contracts (accounting for downtime) and 90% utilisation on bare-boat contracts at current contracted rates for an estimated useful life of 5 years, and zero residual value.

3. Offshore logistic vessels: We take the book value of its assets in this division as of 31 December 2014.

4. Associates: We mark-to-market Ezion’s equity stakes in Ausgroup and Charisma Energy.

5. We assume maintenance capex of USD40m per year from 2018-27 and USD20m thereafter to 2031 when all fleets are retired.

Ezion: SOTP valuation Valuation (USD m) Valuation (SGD m) Per share (SGD) Liftboats and Service rigs 2,119 2,967 1.84 Offshore logistics vessels 197 276 0.17 Net debt (1,280) (1,792) (1.11) Equity stake in Ausgroup 16 0.01 Equity stake in Charisma Energy 51 0.03 SOTP value 1,518 0.94 Source: Daiwa estimates

Based on our conservative SOTP-based valuation, we derive a 12-month target price of USD0.94 which represents 31% potential upside. We believe the market has over-reacted to the recent drop in earnings due to higher-than-expected downtime on some of its rigs, as well as re-deployment of certain rigs in lieu of future contract visibility.

On the above account, we reaffirm our Buy (1) rating with a new 12-month SOTP-based (previously on PER) target price of SGD0.94 (from SGD1.24). The key risk is a higher- than-expected degree of rig downtime.

PACRA: trading significantly below RNAV Global OSV newbuild prices (USDm) Newbuild prices 2012 2013 2014 YTD2015 YoY change Very Large AHTS 240t BP 88.0 86.0 88.0 77.0 -13% Large AHTS 200t BP 61.5 61.0 56.5 48.0 -15% Medium AHTS 120t BP 30.0 29.0 26.5 21.0 -21% Small AHTS 80t BP 17.0 16.0 13.0 10.0 -23% Large Supply 4,000dwt 43.5 44.0 39.5 33.0 -16% Medium Supply 3,200 dwt 31.0 31.0 26.5 20.0 -25% OSV newbuild index 91.0 90.0 84.0 70.0 -16% Source: Clarksons Research. Data as at June 2015

Based on our estimates, PACRA is trading currently at a P/RNAV of around 0.52x for 2015E where we have made adjustments to the book value of its fleet of wholly owned vessels to better reflect the current market value of newbuilds and second-hand offshore

Singapore Oil Services Sector: 21 September 2015

vessels. We estimate that the PPE reflected in the company’s book is overvalued to the tune of USD84m. This premium only represents around 12% of its total PPE value before adjustments. Recall that PACRA has been able to construct its vessels at a 20% discount to 2014 market value. Since then, asset prices of newbuilds and second-hand vessels have trended down by 16-27%, according to data from Clarksons Research. Hence, we believe the impact on PACRA’s balance sheet is minimal, with only a 12% downward adjustment to its PPE value.

Global OSV second-hand asset prices (USDm) Secondhand prices 2012 2013 2014 YTD2015 YoY change AHTS 200t BP - 5 year old 57.0 58.0 52.5 43.0 -18% AHTS 200t BP - 10 year old 37.5 37.0 32.5 27.0 -17% AHTS 120t BP - 5 year old 25.5 24.8 22.5 18.0 -20% AHTS 120t BP - 10 year old 16.0 15.3 12.0 8.5 -29% AHTS 120t BP - 20 year old 8.3 7.5 4.5 2.0 -56% AHTS 80t BP - 5 year old 15.3 14.5 12.0 9.0 -25% AHTS 80t BP - 10 year old 10.0 9.7 7.3 5.3 -28% AHTS 80t BP - 20 year old 5.0 4.8 2.5 1.3 -50% Supply 4,000 dwt - 5 year old 38.0 41.0 37.0 28.0 -24% Supply 4,000 dwt - 10 year old 26.0 26.0 21.0 15.0 -29% Supply 4,000 dwt - 20 year old 12.0 11.8 7.5 4.0 -47% Supply 3,200 dwt -5 year old 30.0 29.0 24.0 17.5 -27% Supply 3,200 dwt -10 year old 19.0 19.0 15.0 10.0 -33% Supply 3,200 dwt -20 year old 10.0 9.0 5.5 2.5 -55% OSV secondhand Index 74.0 74.0 61.0 46.0 -25% Source: Clarksons Research

Even if asset prices were to decline by a further 30% from hereon, the liquidation value of assets would remain higher than PACRA’s current market capitalisation.

PACRA: vessel fleet Vessel type Specifications No. of units Est market value (USDm) DSV 12 men sat div system, 100 ton AHC subsea crane 3 105 AHTS 5150 BHP 2 16 AHTS 6000 BHP 1 10 AHTS 8200 BHP 1 18 AHTS 12000 BHP 1 25 PSV 3000 DWT 2 36 PSV 3500 DWT/diesel electric 3 75 MPSV 3200 BHP 5 25 AHT 4400-5150 BHP 6 24 MWV 120 men, 40 ton crane 2 60 MWV 208 men, 64 ton crane 1 40 SCV 6866 DWT 1 8 AWB 120 men 1 8 AWB 200 men, 50 ton crane 1 15 AWB 200 men, 40 ton crane, 70 ton crane 1 20 Utility 1000-2000 BHP 3 6 Tugs and barges 26 26

Newbuilds AWB 450 men 1 40 PSV 4,000-4,900 dwt 5 150 AHTS 6,000-8,000 BHP 8 112 Total market value (USDm) 74 819 Unpaid Capex -220 Net value 599 Book value as of 30 June 2015 683 Excess of Book Value -84

PACRA's book value as of 30 June 2015 418 Adjusted book value (USD) 334 Adjusted book value (SGD) 468 Current market value (SGD) 243 Adjusted P/B 0.52 Source: Company, Daiwa estimates

PACRA’s current share price provides a good margin of safety relative to its RNAV, in our view. However, downside risk persists as a result of the current bearish environment where stocks with a significantly large amount of debt are being shunned by the market. We

Singapore Oil Services Sector: 21 September 2015

estimate that PACRA’s net gearing could increase to 1.0x by the end of 2015 upon taking delivery of newbuild vessels.

The OSV market remains fraught in a cloud of uncertainty, where poor industry fundamentals could result in financially weaker companies going under, assuming a prolonged period of weak oil prices. We maintain our Hold (3) rating on PACRA stock as we do not anticipate an earnings turnaround for the company in the next 12 months. Management has already guided for a potentially weak 2H15, with an earnings recovery only likely in 2H16. We would need to see a substantial and sustainable improvement in the utilisation rates of its OSVs, as well as cost-savings initiatives ultimately translating into higher margins before turning positive on the stock.

Our new 12-month target price of SGD0.32 (from SGD0.40) is based on our revised 2015- 16E EPS on an unchanged target PER of 8.9x. The new target price also implies a 53% discount to our revalued 2015E book value, compared with 55% for its international peers. However, note that PACRA’s average vessel age is significantly lower than that for the major OSV operators, and hence we think the stock deserves to trade at a PBR premium. The key upside risk would be a strong upturn in the industry, while continued weakness in utilisation is the main downside risk.

Ezra: pricing for naught Ezra is trading currently at only a 0.2x PBR for 2015E, which we believe is an unjustifiably low figure, and we think the company is worth more to shareholders on a liquidation basis than as an ongoing entity. The recent 50% sale of its subsea business to Chiyoda at 65cts to the dollar is a win-win situation for both entities, in our view, as it gives Chiyoda the ability to acquire an asset-backed business on the cheap, while the cash infusion for Ezra is a much-needed reprieve, given the gearing concerns bogging down the company in recent quarters. Chiyoda now also shares half the working capital requirements for the new JV.

We are, however, still concerned about the outlook for its subsea construction business. Ezra will need to contend with international heavyweights within the subsea construction arena, such as Technip, Subsea 7 and Saipem (collectively termed the Big-3) for future orders, and this could prove to be an uphill task despite the introduction of Chiyoda as a major partner. Even if order wins do materialise, the margins on these projects would likely be razor-thin, as oil companies are unlikely to be paying a premium for jobs at this juncture.

We do not foresee any earnings turnaround for the company in the next 2-3 years. Cash flow could dry up in the event that expected orders, and subsequently earnings, do not materialise. Moreover, the company might be forced to make drastic impairment of its fixed assets in today’s weak operating climate, sparking yet another round of cash calls.

Ezra: impact of asset impairment on PBR and net gearing Reduction of assets 20% 25% 30% 35% 40% 45% 50% 52% Change in P/B value 0.34 0.40 0.49 0.64 0.92 1.63 7.09 (20.74) Change in net gearing 2.63 3.13 3.85 5.02 7.20 12.76 55.55 (162.40) Source: Daiwa estimates

Assuming a 25% decline in asset value, full impairment of goodwill and removal of the impact of perpetual securities from its equity position, the adjusted net asset value would decline by USD836m to USD516m (before taking into consideration the subsea de- consolidation), on our estimates. The adjusted PBR would thus increase from 0.2x to 0.4x, while net gearing increases from 1.2x to 3.1x. A 52% fall in asset value would see Ezra’s equity value completely wiped out, on our estimates.

We believe that given the current weak state of the subsea construction arena due to major capex reductions pertaining to deepwater activities, orders in the next 1-2 years will

Singapore Oil Services Sector: 21 September 2015

likely decline. Even if orders do materialise, we think operators like Ezra will have to make do with miniscule returns that do not justify such massive capex investment in the first place. A long overdue impairment to its asset would trigger the next round of derating, in our view.

Ezra: negative free cash flow (USD m) Ezra: PPE growth (USD m) 0 2,500 (50) (100) 2,000 (150) 1,500 (200)

(250) 1,000 (300) (350) 500 (400) 0

(450)

2009 2010 2011 2006 2007 2008 2012 2013 2014 (500) 2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD2015 Source: Bloomberg Source: Bloomberg

The company has not generated any free cash flow in its past 10 financial years, according to data from Bloomberg, as it has focused on growing its asset base, with total PPE witnessing a 40% CAGR over the same horizon. However, we believe the massive asset investment will come to naught, as the company could be forced to downsize if the downturn turns out to be a protracted one, as we envision.

In our opinion, the sale to Chiyoda is a step backward with regard to its ambition to be a subsea behemoth. The company probably anticipates that without the financial assistance of a larger entity, even with the right assets, it would not have sufficient working capital to take on larger projects with better margins. The de-consolidation of the subsea business also decreases transparency with regard to its credit profile as gearing levels in this division can no longer be easily monitored.

We reiterate our Underperform (4) rating on Ezra despite its current low PBR of 0.2x for 2015E. We believe book value is inflated at current levels and hence, valuing the company on a PBR makes for a poor comparison. Instead, we prefer to focus on its ability to generate future earnings, taking into consideration net gearing levels as well.

Our SOTP-derived 12-month target price is now SGD0.116 (previously SGD0.14). This is based on our divisional EV/EBITDA assumptions, reflecting our weaker EBITDA forecast over FY16 for its subsea services divisions due to the 50% sale, offset by lower net debt due to the deconsolidation of the subsea business. The key risk to our call: a strong rebound in oil prices.

Initiating sector coverage with a Negative view We initiate coverage of the Singapore Oil Services Sector with a Negative view. In our opinion, the outlook for the sector remains hazy and we do not think a recovery is on the horizon, given an industry fraught with oversupply issues. The bright spot remains the liftboat segment, where requirements for opex to improve well productivity should remain relatively resilient despite short-term setbacks along with major reductions in capex.

Despite our negative view on the sector, we see valuations of the oil services companies within our universe starting to look attractive for investors with a longer-term horizon, given that the share prices of some of these counters have fallen in excess of 80% since their peak. We believe some of these companies will fall victim to the downturn due to credit- related issues, leading to bankruptcy, while others will emerge as stronger and leaner entities. We reiterate our Buy (1) call on Ezion, our Hold (3) on PACRA and our Underperform (4) on Ezra.

Singapore Oil Services Sector: 21 September 2015

Ezra: gross profit margin Ezra: EV to EBITDA 40% 40 33.7% 35% 35 28.7% 30 30% 25 22.3% 25% 19.2% 20 17.1% 17.9% 20% 16.9% 16.7% 15.9% 15 14.2% 13.6% 10 15% 16.2% 17.9% 14.9% 16.3% 5 10% 13.7% 12.2% 11.7% 0 5%

0.7%

Oct-13 Oct-12 Apr-13 Apr-14 Oct-14 Apr-15

Jun-13 Jun-14 Jun-15

Feb-14 Feb-13 Feb-15

Dec-14 Dec-12 Aug-13 Dec-13 Aug-14 Aug-15 0% Aug-12

Enterprise Value/EBITDA +1 SD

1Q2015 2Q2015 3Q2015

4Q2014 -1 SD Average

1QFY11 3QFY12 1QFY14 3QFY11 4QFY11 1QFY12 2QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 2QFY14 3QFY14 2QFY11 Source: Company Source: Bloomberg

PACRA: gross profit margin PACRA: EV to EBITDA 50% 14 13 45% 44.3% 40% 41.2% 40.2% 12 35% 34.6% 35.9% 32.7% 11 30% 10 27.9% 25% 29.2% 9 20% 21.1% 8 15% 7 6 10% 8.8%

Jul-14 Jul-15

Oct-14 Apr-15

Jan-15 Jun-15 Jun-14 Jan-15 Jun-15

Mar-15 Mar-15

Feb-15

Aug-14 Sep-14 Sep-14 Nov-14 Nov-14 Dec-14 Aug-15 0% May-15 EV/EBITDA -2 SD -1 SD Average 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company Source: Bloomberg

Ezion: gross profit margin Ezion: EV to EBITDA 55% 40 51.1% 51.0% 50.1% 50.6% 48.7% 50% 48.2% 30 46.3% 46.1% 44.9% 20 45% 10 40% 0

35%

Apr-13 Oct-12 Oct-13 Apr-14 Oct-14 Apr-15

Jun-13 Jun-14 Jun-15

Feb-13 Feb-14 Feb-15

Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Aug-15 34.9% Aug-12 Enterprise Value/EBITDA +1 SD 30% -1 SD -2 SD 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Average Source: Company Source: Bloomberg

Singapore Oil Services Sector: 21 September 2015

Global O&G valuations Company Bloomberg Local Share Mkt Cap PER (x) EV/EBITDA (x) PBR (x) Yield (%) Code Currency Price USDm FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY14 FY15E SAIPEM SPA SPM.IM EUR 8.16 3,152 (11.8) 13.8 11.6 10.6 6.7 6.5 1.1 1.0 0.4% 1.9% WOOD GROUP (JOHN) PLC WG/.LN GBp 601.00 1,449 11.7 13.1 11.9 7.6 8.4 7.9 83.5 80.6 0.0% 0.1% PETROFAC LTD PFC.LN GBp 803.00 1,776 20.8 8.4 8.0 9.6 5.8 5.5 151.2 130.0 0.1% 0.1% SBM OFFSHORE NV SBMO NA EUR 10.22 1,892 8.5 6.8 5.8 11.8 10.3 9.3 0.8 0.7 0.2% 2.0% SUBSEA 7 SA SUBC.NO NOK 68.00 2,798 7.2 16.0 13.3 2.9 4.2 3.8 0.5 3.7 0.0% 0.1% TECHNIP SA TEC.FP EUR 45.06 4,619 11.5 9.9 11.3 3.5 3.5 3.9 1.2 1.1 4.4% 4.5% EPC/SURF 8.0 11.3 10.3 7.7 6.5 6.2 39.7 36.2 0.9% 1.4%

GULFMARK OFFSHORE INC-CL A GLF.US USD 7.13 183 (6.0) (4.6) (9.4) 11.5 12.2 8.6 0.2 0.2 0.0% 0.0% SEACOR HOLDINGS INC CKH.US USD 62.32 1,116 54.0 22.1 20.8 9.7 6.5 7.6 0.8 0.7 0.0% 0.0% TIDEWATER INC TDW.US USD 15.77 741 (41.1) (16.0) (90.6) 9.5 11.4 9.3 0.3 0.3 6.3% 4.8% HORNBECK OFFSHORE SERVICES HOS.US USD 16.20 581 11.8 30.7 19.9 6.0 7.1 6.1 0.4 0.4 0.0% 0.0% SCOMI ENERGY SERVICES BHD SES.MK MYR 0.27 150 8.4 6.3 4.0 4.1 3.6 3.2 0.7 0.7 0.0% 0.0% FARSTAD SHIPPING FAR.NO NOK 16.30 79 (3.2) (2.0) (1.4) 7.4 9.1 10.9 0.1 0.1 18.4% 9.2% OSV 4.0 6.1 (9.5) 8.0 8.3 7.6 0.4 0.4 4.1% 2.3%

DIAMOND OFFSHORE DRILLING DO.US USD 20.18 2,768 9.5 46.0 35.1 5.6 7.8 7.4 0.6 0.6 2.5% 2.5% ROWAN COMPANIES PLC-A RDC.US USD 17.09 2,133 5.9 7.2 21.9 5.1 5.3 7.1 0.4 0.4 2.3% 2.3% ATWOOD OCEANICS INC ATW.US USD 16.52 1,068 2.3 3.5 20.8 3.6 4.7 8.5 0.4 0.3 5.9% 6.0% HELMERICH & PAYNE HP.US USD 49.27 5,309 16.4 179.2 60.1 4.6 7.7 6.4 1.1 1.1 5.6% 5.6% ENSCO PLC-CL A ESV.US USD 15.44 3,639 3.8 6.3 10.1 4.2 5.4 6.8 0.4 0.4 3.9% 3.9% NOBLE CORP PLC NE.US USD 11.47 2,775 4.8 9.5 49.9 4.9 6.1 7.9 0.4 0.4 13.1% 11.3% TRANSOCEAN LTD RIG.US USD 14.31 5,204 4.2 56.8 (34.2) 3.7 7.7 8.4 0.4 0.4 8.0% 2.1% SEADRILL LTD SDRL.NO NOK 56.90 3,475 2.9 4.0 5.9 5.7 6.6 7.5 0.3 2.3 0.2% 0.2% FRED OLSEN ENERGY ASA FOE.NO NOK 40.48 334 17.4 25.9 (251.4) 2.6 2.9 3.9 2.2 2.0 0.0% 0.0% PACIFIC DRILLING SA PACD.US USD 1.59 343 2.0 (7.5) (2.9) 5.4 7.8 8.8 0.1 0.1 0.0% 0.0% ABAN OFFSHORE LTD ABAN.IN INR 245.25 218 3.0 2.6 2.3 7.1 6.9 6.5 0.2 0.2 1.5% 1.6% DRILLERS 6.6 30.3 (7.5) 4.8 6.3 7.2 0.6 0.8 3.9% 3.2%

SEMBCORP MARINE LTD SMM.SP SGD 2.40 3,590 10.8 11.4 12.4 8.0 8.1 8.3 1.6 1.5 4.6% 4.2% KEPPEL CORP LTD KEP.SP SGD 7.15 9,250 9.1 9.4 11.0 6.4 6.3 8.0 1.2 1.1 5.5% 5.5% COSCO CORP SINGAPORE LTD COS.SP SGD 0.32 604 88.7 50.7 57.4 14.0 14.6 13.5 0.6 0.6 0.0% 0.0% YANGZIJIANG SHIPBUILDING YZJSGD.SP SGD 1.16 3,200 6.6 6.8 7.0 5.0 5.4 5.1 0.9 0.8 5.4% 4.4% SINGAPORE YARDS 28.8 19.6 22.0 8.4 8.6 8.7 1.1 1.0 3.9% 3.5%

SWIBER HOLDINGS LTD SWIB.SP SGD 0.21 66 143.8 2.5 1.8 13.9 11.6 10.5 NA NA 0.0% 0.0% EZRA HOLDINGS LTD* EZRA.SP SGD 0.12 262 23.2 15.7 14.9 10.2 6.8 6.1 0.2 0.2 5.6% 5.6% EZION HOLDINGS LTD* EZI.SP SGD 0.72 800 5.0 3.1 3.8 6.7 4.3 3.9 0.6 0.5 0.2% 0.2% VARD HOLDINGS LTD VARD.SP SGD 0.43 370 74.6 16.4 18.4 45.7 12.1 12.6 0.7 0.7 0.0% 0.0% MERMAID MARITIME PCL MMT.SP SGD 0.16 165 9.4 6.8 2.9 4.1 3.0 2.2 10.1 9.8 2.6% 3.7% PACIFIC RADIANCE LTD* PACRA.SP SGD 0.34 177 11.9 7.2 3.3 9.2 6.6 4.0 0.4 0.4 0.0% 4.6% PACC OFFSHORE SERVICES HOLDI POSH.SP SGD 0.32 411 11.3 5.4 4.7 9.9 7.0 6.7 0.4 0.4 1.4% 2.7% SINGAPORE OIL SERVICES 39.9 8.2 7.1 14.2 7.3 6.6 2.1 2.0 1.4% 2.4% Source: Bloomberg, *Daiwa forecasts; pricing as of 18 September 2015

Singapore Oil Services Sector: 21 September 2015

Key risks to our Negative view A rapid recovery in oil prices A sustainable oil price recovery would need to be supported by improving fundamentals within the industry. This boils down to better supply-demand mix, where strong oil demand more than offsets higher supply from shale and OPEC members, resulting in an overall inventory decline. However, we do not foresee such an event happening, with weak demand from countries such as China, which is experiencing a slowdown in its economy, now a major concern.

Without a sustainable oil price recovery, oil companies will have little incentive to resume capex spending on projects previously deferred. This will flow through to weaker demand for drilling assets, and similarly, supporting assets such OSVs. However, a rapid rise in oil prices could potentially trigger a positive knock-on effect for the oil services industry.

A stronger-than-expected improvement in margins The oil service companies under our coverage have all underperformed in terms of meeting our earnings expectations for 1H15, mainly a result of poor margins from poorer- than-expected utilisation of their product offerings. PACRA’s subsea division remained weak in 2Q15, with utilisation close to 0%.

Ezion’s liftboats/service rigs ran at a 75% utilisation for 2Q15, due to downtime for repair and maintenance works on 6 of its units. Ezra’s subsea and offshore support division both generated lower utilisation for 1H15 compared to a year ago. As cost-cutting measures could not keep pace with rapidly declining revenue, overall margins were negatively affected in 1H15.

We expect companies like Ezra to show little reprieve in terms of margin improvement. On the other hand, we would be on the look-out for a sustainable improvement in margins for companies like PACRA due to various cost-management initiatives in place. Higher-than- expected margin improvements resulting in a better earnings performance in a weak operating environment could result in a substantial upward rerating of the stock, and hence the sector.

Singapore Energy 21 September 2015

Ezion Holdings (EZI SP)

Ezion H oldi ngs

Target price: SGD0.940 (from SGD1.240) Share price (18 Sep): SGD0.715 | Up/downside: +31.4%

Still the best of the lot

 Liftboat industry remains relatively resilient Royston Tan (65) 6321 3086  Plans to take delivery of 12 contracted rigs from 2H15-2016 [email protected]  Reiterating our Buy (1) call; cutting target price to SGD0.94

What's new: Ezion’s share price has corrected by about 45% YTD, due to Forecast revisions (%) a combination of low oil prices from the weak global macro outlook as well Year to 31 Dec 15E 16E 17E as its disappointing 1H15 earnings, in our view. However, we believe the Revenue change (5.4) (3.1) (20.8) liftboat industry should remain relatively resilient and that demand for Net profit change (10.3) (3.2) (29.7) Ezion’s liftboat assets will be maintained at a high level, driven by its Core EPS (FD) change (10.3) (3.2) (29.7) customers’ opex requirements that cannot be deferred indefinitely. Ezion’s Source: Daiwa forecasts ability to renew the contracts for 4 out of 5 liftboats that are due to expire in 2015 is a testament to the quality of its liftboat assets, demand for which Share price performance remains robust. (SGD) (%) 2.0 105 What's the impact: Increasing revenue contribution due to its larger 1.6 86 1.2 68 fleet. We expect Ezion to take delivery of an additional 6 rigs in 2H15 and 6 0.8 49 rigs in 2016, bringing the total size of its fleet to 37 liftboats/service rigs by 0.4 30 the end of next year. All its assets have been contracted on a long-term Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 basis (2-4 years). We believe the company’s earnings visibility is what sets Ezion Hold (LHS) Relative to FSSTI (RHS) it apart from the other oil-services companies, many of which are struggling with low utilisation rates. 12-month range 0.550-1.910 Market cap (USDbn) 0.80 EPS forecast revisions. We are cutting our 2015-17 earnings forecasts by 3m avg daily turnover (USDm) 10.22 3-30% to account for our lower revenue assumptions. In 2017E, we cut our Shares outstanding (m) 1,579 revenue by 21%, as we now assume that all service rigs will be scrapped at Major shareholder Chew Thiam Keng (14.2%) the end of their current charter period, given the relatively old age of these assets (most in excess of 30 years), resulting in a 30% cut to our earnings. Financial summary (USD) Year to 31 Dec 15E 16E 17E What we recommend: We are changing our valuation method from a PER Revenue (m) 404 551 495 basis to an SOTP, as we feel that an SOTP is a more appropriate method Operating profit (m) 157 276 220 to account for the entire cash flow generated from its fleet of Net profit (m) 165 269 215 liftboats/service rigs. As a result, we now have a lower SOTP-derived 12- Core EPS (fully-diluted) 0.102 0.167 0.134 EPS change (%) (12.3) 63.1 (19.9) month target price of SGD0.94 (from SGD1.24). Also, we now use a DCF Daiwa vs Cons. EPS (%) 7.8 15.2 (16.4) to value its main liftboat/service-rig division (PER previously), given the PER (x) 5.0 3.1 3.8 strong cash flow visibility that we see from these assets, which are Dividend yield (%) 0.2 0.2 0.2 chartered on a long-term basis. DPS 0.001 0.001 0.001 PBR (x) 0.6 0.5 0.5 We have changed our key assumptions for the company, and now assume EV/EBITDA (x) 6.7 4.3 3.9 ROE (%) 13.9 19.2 13.1 that no new contracts will be awarded to Ezion over 2015-17E vs. our previous assumption of USD75-150m in new order wins for the same Source: FactSet, Daiwa forecasts period.

The key downside risk to our view would be further delays in asset deployment that would impact the company’s overall utilisation and margins. How we differ: Our 2017E EPS is 16% below the Bloomberg consensus due to our lower revenue and net profit assumptions, as we expect its service rig contracts to not be renewed. But our 2015-16 EPS are 8-15% above consensus due to our higher revenue forecast, on the back of our higher expected utilisation for its incoming liftboats.

See important disclosures, including any required research certifications, beginning on page 54

Ezion Holdings (EZI SP): 21 September 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Contract Wins (USD m) - Relating to 0 183 1,273 715 660 0 0 0 LiftBoats/Service Rigs additions LiftBoats/Service Rigs additions 0 2 4 4 8 9 6 0 Bareboat charter utilisation rate (%) n.a. n.a. n.a. n.a. n.a. 90.0 90.0 90.0 Time charter utilisation rate (%) n.a. n.a. n.a. n.a. n.a. 75.0 75.0 75.0

Profit and loss (USDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Offshore Support Logistics Vessels 78 65 67 111 88 0 0 0 LiftBoats & Service Rigs 22 42 92 171 299 404 551 495 Other Revenue 0 0 0 0 0 0 0 0 Total Revenue 100 107 159 282 387 404 551 495 Other income 11 12 17 29 46 6 10 10 COGS (62) (42) (71) (103) (88) (73) (80) (80) SG&A (12) (9) (12) (18) (19) (20) (28) (24) Other op.expenses (13) (16) (21) (50) (110) (159) (177) (181) Operating profit 24 52 71 139 214 157 276 220 Net-interest inc./(exp.) (2) (1) (5) (7) (17) (24) (34) (27) Assoc/forex/extraord./others 6 10 4 12 (8) 34 28 28 Pre-tax profit 28 61 70 144 190 167 271 221 Tax (3) (3) (4) (3) (2) (2) (2) (6) Min. int./pref. div./others 0 0 0 0 (0) 0 0 0 Net profit (reported) 25 58 79 160 224 165 269 215 Net profit (adjusted) 25 58 66 142 188 165 269 215 EPS (reported)(USD) 0.029 0.068 0.080 0.133 0.142 0.104 0.170 0.136 EPS (adjusted)(USD) 0.029 0.068 0.067 0.118 0.119 0.104 0.170 0.136 EPS (adjusted fully-diluted)(USD) 0.029 0.061 0.064 0.118 0.117 0.102 0.167 0.134 DPS (USD) 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 EBIT 24 52 71 139 214 157 276 221 EBITDA 32 62 87 184 317 307 445 392

Cash flow (USDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 28 61 70 144 190 167 271 221 Depreciation and amortisation 9 10 17 45 102 149 169 171 Tax paid (1) (1) (2) (2) 12 18 24 34 Change in working capital 4 (20) 19 (10) (165) (18) (63) 13 Other operational CF items 2 (15) (13) (22) 74 70 16 (29) Cash flow from operations 43 35 91 156 213 386 417 410 Capex (120) (132) (663) (709) (458) (430) (200) (80) Net (acquisitions)/disposals 22 59 9 17 4 0 0 0 Other investing CF items 0 2 1 (42) (54) (14) (61) 17 Cash flow from investing (98) (70) (652) (733) (520) (444) (261) (63) Change in debt 60 27 533 530 171 400 200 0 Net share issues/(repurchases) 38 0 101 72 158 0 0 0 Dividends paid (0) (1) (1) (1) (1) (1) (1) (1) Other financing CF items (6) (0) (3) 14 202 (260) (32) (28) Cash flow from financing 92 26 631 615 530 139 167 (29) Forex effect/others 1 0 5 (6) 0 0 0 0 Change in cash 38 (10) 75 33 224 80 323 318 Free cash flow (77) (98) (573) (553) (245) (44) 217 330 Source: FactSet, Daiwa forecasts

Ezion Holdings (EZI SP): 21 September 2015

Financial summary continued … Balance sheet (USDm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 72 63 135 166 372 452 775 1,092 Inventory 1 0 0 0 0 0 0 0 Accounts receivable 34 32 57 107 160 137 189 174 Other current assets 81 32 80 107 128 145 208 195 Total current assets 188 127 273 380 659 734 1,172 1,462 Fixed assets 143 271 794 1,464 2,136 2,416 2,447 2,356 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 45 72 132 199 187 212 240 269 Total assets 376 470 1,198 2,043 2,981 3,362 3,859 4,086 Short-term debt 67 39 77 223 288 288 288 288 Accounts payable 49 38 74 146 132 181 207 214 Other current liabilities 3 4 7 7 7 7 7 7 Total current liabilities 119 82 158 376 427 476 502 509 Long-term debt 56 118 475 863 1,208 1,608 1,808 1,808 Other non-current liabilities 2 2 12 4 33 13 16 17 Total liabilities 178 202 645 1,243 1,668 2,097 2,326 2,334 Share capital 155 164 369 443 748 536 536 536 Reserves/R.E./others 44 104 184 357 565 730 998 1,217 Shareholders' equity 199 268 553 800 1,313 1,265 1,533 1,753 Minority interests 0 0 0 (0) (0) (0) (0) (0) Total equity & liabilities 376 470 1,198 2,043 2,981 3,362 3,859 4,086 EV 820 832 1,099 1,535 1,761 2,047 1,896 1,549 Net debt/(cash) 52 95 418 920 1,125 1,444 1,322 1,004 BVPS (USD) 0.188 0.267 0.448 0.584 0.697 0.801 0.971 1.110

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 105.4 6.6 48.4 77.7 37.1 4.6 36.1 (10.0) EBITDA (YoY) 121.8 92.1 40.6 111.5 72.0 (3.2) 45.0 (11.8) Operating profit (YoY) 170.9 121.1 35.2 96.8 54.4 (26.6) 75.3 (19.8) Net profit (YoY) 207.9 130.9 13.6 114.6 32.6 (12.3) 63.1 (19.9) Core EPS (fully-diluted) (YoY) 190.7 109.3 4.3 85.1 (0.8) (12.3) 63.1 (19.9) Gross-profit margin 38.0 60.9 55.0 63.3 77.2 81.9 85.5 83.8 EBITDA margin 32.2 57.9 54.9 65.4 82.0 75.9 80.8 79.2 Operating-profit margin 23.5 48.8 44.5 49.3 55.5 38.9 50.1 44.6 Net profit margin 25.1 54.3 41.6 50.2 48.6 40.7 48.8 43.4 ROAE 17.8 29.8 19.6 24.7 20.8 13.9 19.2 13.1 ROAA 8.0 13.7 7.9 8.7 7.5 5.2 7.4 5.4 ROCE 8.6 13.9 9.2 9.3 9.1 5.3 8.1 5.9 ROIC 9.4 16.2 10.0 10.1 10.2 6.0 9.8 7.6 Net debt to equity 26.2 35.2 75.5 114.9 85.7 114.1 86.2 57.3 Effective tax rate 10.1 4.7 5.6 1.8 1.1 1.2 0.7 2.7 Accounts receivable (days) 93.0 113.7 103.1 106.5 125.9 133.7 108.0 133.9 Current ratio (x) 1.6 1.6 1.7 1.0 1.5 1.5 2.3 2.9 Net interest cover (x) 11.3 76.6 15.0 20.4 12.8 6.4 8.2 8.1 Net dividend payout 1.8 0.9 0.8 0.8 0.7 1.0 0.6 0.7 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. 26.8 40.8 Source: FactSet, Daiwa forecasts

Company profile

Ezion Holdings is an offshore-marine logistics and support services company. It specialises in the development, ownership, and charter of offshore assets and the provision of offshore-marine logistics and support services to the oil and gas industries.

Ezion Holdings (EZI SP): 21 September 2015

Ezion: PBR (x) Ezion: EV/EBITDA multiple (x) 4 40

3 30

2 20

1 10

0 0

Oct-12 Apr-13 Apr-14 Oct-14 Apr-15 Oct-13

Jun-13 Jun-14 Jun-15

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15

Feb-14 Feb-15 Feb-13

Jun-13 Jun-14 Jun-15

Aug-12 Dec-12 Dec-13 Aug-14 Dec-14 Aug-13 Aug-15

Feb-14 Feb-13 Feb-15

Dec-12 Dec-13 Dec-14

Aug-12 Aug-13 Aug-14 Aug-15 Price to Book Ratio +1 SD Enterprise Value/EBITDA +1 SD -1 SD -2 SD -1 SD -2 SD Average Average Source: Bloomberg Source: Bloomberg

Ezion: DCF calculation for its liftboat/service-rigs division Target gearing (debt/capital) (%) 50% Market-risk premium (%) 6.90% Risk-free rate (%) 2.82% Cost of debt (%) 3.82% Cost of equity (%) 12.10% WACC (%) 7.96%

Terminal Value Terminal Growth Rate 0.00% Terminal WACC 7.96% NPV of Terminal Value (as at 30 June 2020) 1,753,504.07 NPV of Terminal Value (as at 30 June 2015) 1,065,934.65 DCF Valuation NPV of Forecasts (USD 000) 1,053,346.87 NPV of Terminal Value (USD 000) 1,065,934.65 Enterprise Value (USD 000) 2,119,281.51 Less: Net Debt (as at 30 June 2015)* 0.00 Equity Value (USD 000) 2,119,281.51 No. Shares (m) 1,608 Per Share Equity Value (USD) 1.32 USD:SGD exchange rate 1.40 Per Share Equity Value (SGD) 1.84 Source: Daiwa estimates; *note: we are assuming that net debt is held at the company level

Ezion: DCF sensitivity for its liftboat/service-rig division Equity Value Equity Value

Discount NPV of Enterprise Equity Per Share Per Share Rate FCF (USD 000) Value (USD 000) Value (USD 000) (USD) (SGD) 5.5% 1,160,450.98 2,401,687.48 2,401,687.48 1.49 2.09 6.0% 1,137,884.22 2,341,548.10 2,341,548.10 1.46 2.04 6.5% 1,115,909.14 2,283,306.65 2,283,306.65 1.42 1.99 7.0% 1,094,506.67 2,226,892.83 2,226,892.83 1.38 1.94 7.5% 1,073,658.46 2,172,239.29 2,172,239.29 1.35 1.89 8.0% 1,053,346.87 2,119,281.51 2,119,281.51 1.32 1.84 8.5% 1,033,554.88 2,067,957.67 2,067,957.67 1.29 1.80 9.0% 1,014,266.14 2,018,208.47 2,018,208.47 1.25 1.76 9.5% 995,464.89 1,969,977.08 1,969,977.08 1.22 1.71 10.0% 977,135.95 1,923,209.01 1,923,209.01 1.20 1.67 10.5% 959,264.68 1,877,851.97 1,877,851.97 1.17 1.63 Source: Daiwa estimates

Ezion: SOTP valuation Valuation (USD 000) Valuation (SGD 000) Per share (SGD) Liftboats and service rigs 2,119,282 2,966,994 1.84 Offshore logistics vessels 197,000 275,800 0.17 Net debt (1,280,000) (1,792,000) (1.11) Equity stake in Ausgroup 15,949 0.01 Equity stake in Charisma Energy 50,991 0.03 SOTP value 1,517,733 0.94 Source: Daiwa estimates

Singapore Energy 21 September 2015

Pacific Radiance (PACRA SP)

Paci fic R adi ance

Target price: SGD0.320 (from SGD0.400) Share price (18 Sep): SGD0.335 | Up/downside: -4.4%

Margin of safety from asset value

 Trading at only 0.52x P/RNAV for 2015E Royston Tan (65) 6321 3086  Successful cost-rationalisation exercise is key [email protected]  Maintaining Hold (3) rating; lowering target price to SGD0.32

What's new: PACRA’s share price has corrected by almost 80% since Forecast revisions (%) peaking at SGD1.50 in August 2014. We believe the company could be one Year to 31 Dec 15E 16E 17E of the earliest contenders to benefit from an industry recovery, though its Revenue change - (11.9) (10.1) prospects will likely remain subdued over the next 6 months, in our view. Net profit change - (28.7) (9.2) PACRA is trading at only 0.47x P/RNAV, which we think provides a large Core EPS (FD) change - (28.7) (9.2) margin of safety for long-term investors looking to ride the uptrend that we Source: Daiwa forecasts expect for the company. Share price performance What's the impact: PACRA is currently trading at 0.4x PBR and 0.52x (SGD) (%) P/RNAV for 2015E, based on our forecasts. We believe that the PPE on its 1.5 105 books are over-valued by only 12% relative to the current market price. 1.2 84 0.9 63 Comparatively, the second-hand resale OSV market has seen a decline of 0.5 41

27% YTD, according to data from Clarksons Research. The smaller decline 0.2 20 in PACRA’s book value is, we believe, attributable to the company’s Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 competitive construction cost structure. Pacific Ra (LHS) Relative to FSSTI (RHS)

Cost management critical for survival. We see an aggressive cost- cutting approach as critical to ensuring the company’s long-term prospects 12-month range 0.295-1.470 Market cap (USDbn) 0.17 in the event of a protracted downturn. The company has reduced its G&A 3m avg daily turnover (USDm) 0.31 expenses by 31% YoY, but it needs to do more to curb direct costs such as Shares outstanding (m) 726 crew expenses, in our view. Major shareholder Pang Yoke Min (66.8%)

Margin improvement could be the first sign of a turnaround. Given a Financial summary (USD) rather benign OSV market, which continues to be fraught by an oversupply Year to 31 Dec 15E 16E 17E situation, we consider a near-term improvement in the vessel utilisation rate Revenue (m) 148 198 242 to be unlikely. However, we believe PACRA’s cost-rationalisation initiatives Operating profit (m) 27 37 63 could translate to higher margins in the coming quarters. Net profit (m) 15 24 54 Core EPS (fully-diluted) 0.020 0.033 0.074 EPS change (%) (78.5) 64.7 121.6 EPS changes. We trim 2016-17E EPS by 9-29% due to our lower Daiwa vs Cons. EPS (%) (12.1) (33.4) 7.0 utilisation and day-rate assumptions, which feed through to weaker PER (x) 11.9 7.2 3.3 revenue and earnings forecasts. Dividend yield (%) 0.0 4.6 4.6 DPS 0.000 0.011 0.011 What we recommend: We continue to rate PACRA as a Hold (3), with a PBR (x) 0.4 0.4 0.3 12-month target price of SGD0.32 (previously SGD0.40), based on our EV/EBITDA (x) 9.2 6.6 4.0 ROE (%) 3.4 5.4 11.1 revised 2015-16EPS and an unchanged target PER of 8.9x (which is a Source: FactSet, Daiwa forecasts 30% discount to the average of its regional peers, at 12.6x). Our new TP also implies a 48% discount to our revalued 2015E book value, which provides a large margin of safety for longer-term investors who are prepared to weather possible short-term volatility in PACRA’s share price.

The key upside risk would be a strong upturn in the industry; the main downside risk would be a prolonged weakness in its asset utilisation rate.

How we differ: We are 12-33% below the consensus 2015-16E EPS, due to our lower operating-margin assumptions.

See important disclosures, including any required research certifications, beginning on page 54

Pacific Radiance (PACRA SP): 21 September 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Utilization rate for OSV Vessels (%) 63.0 87.0 79.0 81.0 80.0 60.0 70.0 70.0 Utilization rate for DSV Vessels (%) 0.0 48.0 54.0 82.0 57.5 15.0 55.0 61.3 Rate for OSV Vessels (USD/day) n.a. n.a. n.a. n.a. n.a. 17,585 15,827 16,301 Rate for DSV Vessels (USD/day) n.a. n.a. n.a. n.a. n.a. 61,800 55,620 55,620

Profit and loss (USDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Other Revenue n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Total Revenue 60 95 131 169 172 148 198 242 Other income 27 18 22 26 43 10 5 15 COGS (35) (48) (70) (84) (90) (74) (96) (123) SG&A (11) (14) (18) (27) (30) (21) (22) (27) Other op.expenses (14) (21) (27) (31) (30) (36) (49) (44) Operating profit 26 30 37 52 65 27 37 63 Net-interest inc./(exp.) (7) (10) (11) (13) (9) (13) (13) (13) Assoc/forex/extraord./others (1) (2) 3 14 13 2 6 8 Pre-tax profit 18 19 29 53 68 17 29 58 Tax (3) (0) 3 4 1 (2) (3) (2) Min. int./pref. div./others (0) 0 0 (0) (1) 0 (2) (3) Net profit (reported) 15 19 32 57 68 15 24 54 Net profit (adjusted) 15 19 32 57 68 15 24 54 EPS (reported)(USD) 0.027 0.034 0.058 0.078 0.094 0.020 0.033 0.074 EPS (adjusted)(USD) 0.027 0.034 0.058 0.078 0.094 0.020 0.033 0.074 EPS (adjusted fully-diluted)(USD) 0.027 0.034 0.058 0.078 0.094 0.020 0.033 0.074 DPS (USD) n.a. n.a. n.a. n.a. 0.022 0.000 0.011 0.011 EBIT 26 30 37 52 65 27 37 63 EBITDA 40 48 61 77 93 59 80 108

Cash flow (USDm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 18 19 29 53 68 17 29 58 Depreciation and amortisation 14 17 25 25 28 31 44 44 Tax paid (0) (0) (1) (0) (4) 0 0 0 Change in working capital (49) 17 (17) (20) 17 (20) (4) (12) Other operational CF items (25) (9) (18) (29) (48) 25 (6) (8) Cash flow from operations (42) 43 17 29 61 53 63 82 Capex (131) (84) (74) (192) (207) (300) (100) (50) Net (acquisitions)/disposals 120 4 79 79 161 47 49 68 Other investing CF items 1 (0) (16) (3) (7) 0 0 0 Cash flow from investing (10) (80) (12) (116) (53) (253) (51) 18 Change in debt 42 39 4 13 39 120 0 0 Net share issues/(repurchases) 0 0 0 125 0 0 0 0 Dividends paid 0 (0) 0 (7) (11) 0 (8) (8) Other financing CF items 0 (0) (1) (4) 0 0 0 0 Cash flow from financing 43 39 4 128 28 120 (8) (8) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (10) 2 9 41 37 (80) 4 91 Free cash flow (173) (40) (57) (162) (146) (247) (37) 32 Source: FactSet, Daiwa forecasts

Pacific Radiance (PACRA SP): 21 September 2015

Financial summary continued … Balance sheet (USDm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 12 14 24 65 101 21 25 116 Inventory 0 0 2 3 3 3 4 5 Accounts receivable 22 25 37 55 42 55 63 77 Other current assets 24 6 33 29 55 20 20 20 Total current assets 59 45 95 152 201 100 112 218 Fixed assets 362 443 446 549 572 794 801 739 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 5 27 30 45 66 68 74 82 Total assets 426 515 571 746 840 961 987 1,039 Short-term debt 51 54 55 53 52 52 52 52 Accounts payable 6 7 7 11 16 9 13 16 Other current liabilities 40 54 67 54 48 48 51 53 Total current liabilities 97 114 129 119 116 108 116 121 Long-term debt 171 221 225 240 276 396 396 396 Other non-current liabilities 4 4 11 10 16 10 10 10 Total liabilities 273 339 364 368 408 515 522 527 Share capital 32 32 32 155 163 163 163 163 Reserves/R.E./others 122 144 173 220 265 280 296 342 Shareholders' equity 153 176 205 376 428 443 459 504 Minority interests 0 0 2 2 4 4 5 8 Total equity & liabilities 426 515 571 746 840 961 987 1,039 EV 380 408 403 360 339 538 530 433 Net debt/(cash) 210 261 256 228 227 427 423 332 BVPS (USD) 0.278 0.319 0.371 0.518 0.590 0.610 0.632 0.695

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. 59.0 37.6 28.9 2.2 (14.1) 33.6 22.6 EBITDA (YoY) n.a. 19.1 29.1 26.3 19.7 (36.8) 36.7 34.0 Operating profit (YoY) n.a. 17.0 22.9 40.5 23.7 (58.1) 34.4 73.6 Net profit (YoY) n.a. 25.2 73.7 76.4 20.3 (78.5) 64.7 121.6 Core EPS (fully-diluted) (YoY) n.a. 25.2 73.7 34.0 20.3 (78.5) 64.7 121.6 Gross-profit margin 40.7 49.8 46.7 49.9 47.6 50.3 51.6 49.2 EBITDA margin 66.7 50.0 46.9 46.0 53.9 39.6 40.6 44.4 Operating-profit margin 43.4 31.9 28.5 31.1 37.7 18.4 18.5 26.2 Net profit margin 24.7 19.5 24.6 33.7 39.7 9.9 12.2 22.1 ROAE 19.3 11.3 16.9 19.6 17.0 3.4 5.4 11.1 ROAA 6.9 3.9 5.9 8.6 8.6 1.6 2.5 5.3 ROCE 13.8 7.3 8.0 9.1 9.1 3.3 4.0 6.8 ROIC 5.8 7.5 8.3 9.8 10.3 3.1 3.7 7.3 Net debt to equity 137.1 148.2 125.0 60.7 53.0 96.4 92.2 65.8 Effective tax rate 18.9 1.1 n.a. n.a. n.a. 12.0 10.5 n.a. Accounts receivable (days) 67.3 89.6 86.1 99.4 102.2 119.3 108.9 105.3 Current ratio (x) 0.6 0.4 0.7 1.3 1.7 0.9 1.0 1.8 Net interest cover (x) 3.9 3.0 3.3 4.0 7.1 2.2 2.7 4.7 Net dividend payout 0.0 0.0 0.0 0.0 23.6 0.0 33.0 14.9 Free cash flow yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. 18.2 Source: FactSet, Daiwa forecasts

Company profile

Pacific Radiance Ltd. offers offshore vessels and support services. The company owns and operates offshore vessels and provides subsea services, shipyards services, marine equipment as well as project logistics to the Oil and Gas industry around the world.

Pacific Radiance (PACRA SP): 21 September 2015

PACRA: 3-year historical PBR (x) PBR: 3-year historical EV/EBITDA (x) 2.5 14 13 2.0 12 1.5 11

1.0 10 9 0.5 8 0.0 7

Jul-14 Jul-15

Apr-14 Oct-14 Apr-15

Jan-14 Jun-14 Jan-15 Jun-15

Mar-14 Mar-15

Feb-14 Feb-15

Nov-13 Dec-13 Nov-14 Dec-14

Aug-14 Sep-14 Aug-15

May-14 May-15

Jul-15 Jul-14

Oct-14 Apr-15

Jun-14 Jan-15 Jan-15 Jun-15 Jun-15

Feb-15 Mar-15 Mar-15

Aug-14 Sep-14 Sep-14 Nov-14 Dec-14 Aug-15 Nov-14 Price to Book Ratio +1 SD -1 SD May-15 EV/EBITDA -2 SD -1 SD Average -2 SD Average Source: Bloomberg Source: Bloomberg

PACRA: gross profit margin trend PACRA: wholly owned fleet (number of vessels)

50% 80 74 68 45% 44.3% 70 64 65 40% 41.2% 40.2% 58 58 60 35% 34.6% 35.9% 32.7% 49 50 30% 27.9% 25% 29.2% 40 21.1% 20% 30 15% 20 10% 8.8% 10 5% 0% 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 2010 2011 2012 2013 2014 2015E 2016E Source: Company Source: Company, Daiwa forecasts

OSV: secondhand asset prices (USDm) Secondhand Prices 2012 2013 2014 YTD2015 YOY change AHTS 200t BP - 5 year old 57.0 58.0 52.5 42.8 -19% AHTS 200t BP - 10 year old 37.5 37.0 32.5 26.8 -18% AHTS 120t BP - 5 year old 25.5 24.8 22.5 17.5 -22% AHTS 120t BP - 10 year old 16.0 15.3 12.0 8.3 -31% AHTS 120t BP - 20 year old 8.3 7.5 4.5 1.8 -61% AHTS 80t BP - 5 year old 15.3 14.5 12.0 8.8 -27% AHTS 80t BP - 10 year old 10.0 9.7 7.3 5.0 -31% AHTS 80t BP - 20 year old 5.0 4.8 2.5 1.2 -54% Supply 4,000 dwt - 5 year old 38.0 41.0 37.0 27.8 -25% Supply 4,000 dwt - 10 year old 26.0 26.0 21.0 14.8 -30% Supply 4,000 dwt - 20 year old 12.0 11.8 7.5 3.8 -50% Supply 3,200 dwt -5 year old 30.0 29.0 24.0 17.8 -26% Supply 3,200 dwt -10 year old 19.0 19.0 15.0 9.5 -37% Supply 3,200 dwt -20 year old 10.0 9.0 5.5 2.3 -59% OSV secondhand Index 74.0 74.0 61.0 45.0 -27% Source: Clarksons Research

Pacific Radiance (PACRA SP): 21 September 2015

PACRA: vessel fleet Vessel Type Specifications No of Units Est market Value (USDm) DSV 12 men sat div system, 100 ton AHC subsea crane 3 105 AHTS 5150 BHP 2 16 AHTS 6000 BHP 1 10 AHTS 8200 BHP 1 18 AHTS 12000 BHP 1 25 PSV 3000 DWT 2 36 PSV 3500 DWT/diesel electric 3 75 MPSV 3200 BHP 5 25 AHT 4400-5150 BHP 6 24 MWV 120 men, 40 ton crane 2 60 MWV 208 men, 64 ton crane 1 40 SCV 6866 DWT 1 8 AWB 120 men 1 8 AWB 200 men, 50 ton crane 1 15 AWB 200 men, 40 ton crane, 70 ton crane 1 20 Utility 1000-2000 BHP 3 6 Tugs and barges 26 26 Newbuilds AWB 450 men 1 40 PSV 4,000-4,900 dwt 5 150 AHTS 6,000-8,000 BHP 8 112 Total Market Value (USD m) 74 819 Unpaid Capex -220 Net value 599 PPE value as of 30 June 2015 683 Excess of Book Value -84

PACRA's Book value as of 30 June 2015 418 Adjusted book value (USD) 334 Adjusted book value (SGD) 468 Current Market value (SGD) 243 Adjusted P/B 0.52 Source: Company, Daiwa estimates

Singapore Energy 21 September 2015

Ezra Holdings (EZRA SP)

Ezra H ol dings

Target price: SGD0.116 (from SGD0.140) Share price (18 Sep): SGD0.124 | Up/downside: -6.4%

Sale of assets to alleviate credit concerns

 Recent rights issue and Chiyoda deal to help alleviate credit concerns Royston Tan (65) 6321 3086  Long-term fundamentals remain weak [email protected]  Reiterate Underperform (4); target price lowered to SGD0.116

What's new: We believe the recent deal with Chiyoda reflects a win-win Forecast revisions (%) situation for both parties: Chiyoda will acquire an asset-backed business at Year to 31 Aug 15E 16E 17E 65cts to the dollar, while the USD180m cash infusion for Ezra should help Revenue change 1.8 (61.3) (62.3) alleviate credit concerns and reduce its net gearing to 0.8x, on the Net profit change 4.3 (3.8) (47.8) company’s estimates. Core EPS (FD) change 4.2 (3.8) (47.7) Source: Daiwa forecasts What's the impact: Selling at 65cts to the dollar. On 27 August 2015, Ezra entered into a binding MOU with Japan’s Chiyoda Corporation for the Share price performance latter to invest in Ezra’s subsea services businesses, EMAS AMC, to form (SGD) (%) EMAS CHIYODA Subsea (JV), a 50:50 joint venture. Chiyoda will pay a 0.6 105 total of USD180m for a 50% ownership in the JV, which is about 35% 0.5 81 below the division’s corresponding book value of USD277m, while Ezra will 0.3 58 0.2 34 convert part of its existing inter-company debt owed by EMAS AMC into 0.0 10 equity. Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

Ezra Holdi (LHS) Relative to FSSTI (RHS) Smaller entity a necessity. We mention in the sector portion of this report that Ezra has been beefing up its subsea capabilities for about a decade now. In our view, this sale at a bargain price level seems to suggest that the 12-month range 0.098-0.586 company can no longer operate the business without the assistance of a Market cap (USDbn) 0.26 3m avg daily turnover (USDm) 5.48 financially strong partner sharing part of its working capital burden. Shares outstanding (m) 2,939 Major shareholder Lee Chye Tek (18.9%) EPS changes. We reduce our revenue forecasts for FY16-17 by 61-62% due to the de-consolidation of its subsea business. We trim our FY17 EPS Financial summary (USD) by 48% to account for our lower gross margin assumptions. Year to 31 Aug 15E 16E 17E Revenue (m) 1,426 600 601 What we recommend: We reiterate our Underperform (4) rating on Ezra, Operating profit (m) 105 44 45 despite its low reported PBR of 0.2x. The transparency relating to its credit Net profit (m) 11 17 18 rd Core EPS (fully-diluted) 0.004 0.006 0.006 profile is now also lower after the de-consolidation of its subsea 3 party EPS change (%) (88.5) 47.5 5.5 debt. Our SOTP-derived 12-month target price is now SGD0.116 Daiwa vs Cons. EPS (%) (23.4) (37.2) (54.1) (previously SGD0.14). This is based on our divisional EV/EBITDA PER (x) 23.2 15.7 14.9 Dividend yield (%) 5.6 5.6 5.6 assumptions, reflecting our weaker EBITDA forecast for FY16 (previously DPS 0.005 0.005 0.005 on blended FY15/16), offset by lower gearing from the de-consolidation of PBR (x) 0.2 0.2 0.2 the subsea business. The key upside risk to our call: a strong rebound in oil EV/EBITDA (x) 10.2 6.9 6.1 prices. ROE (%) 1.0 1.4 1.5 Source: FactSet, Daiwa forecasts How we differ: Our FY15-17E EPS are 23-54% below the Bloomberg consensus, which we attribute to our lower revenue and gross margin assumptions.

See important disclosures, including any required research certifications, beginning on page 54

Ezra Holdings (EZRA SP): 21 September 2015

Financial summary Key assumptions Year to 31 Aug 2010 2011 2012 2013 2014 2015E 2016E 2017E Marine Services segment New Contract n.a. n.a. n.a. n.a. n.a. 500 400 400 Wins (USD m) Subsea Services segment New 83 329 367 900 1,000 500 500 500 Contract Wins (USD m) AHTS Fleet Utilisation rate % n.a. n.a. n.a. n.a. 90.0 80.0 70.0 70.0 PSV Fleet Utilisation rate % n.a. n.a. n.a. n.a. 90.0 80.0 70.0 70.0 Misc. Fleet Utilisation rate % n.a. n.a. n.a. n.a. 90.0 60.0 60.0 60.0

Profit and loss (USDm) Year to 31 Aug 2010 2011 2012 2013 2014 2015E 2016E 2017E Offshore Support Services 199 219 275 285 260 216 199 200 Marine Services 134 160 157 189 188 325 401 401 Other Revenue 21 180 552 788 1,040 886 0 0 Total Revenue 354 559 984 1,262 1,488 1,426 600 601 Other income 24 19 65 105 7 80 0 0 COGS (238) (421) (753) (1,035) (1,197) (1,168) (399) (380) SG&A (50) (69) (135) (166) (157) (154) (59) (59) Other op.expenses (12) (26) (45) (58) (64) (79) (97) (116) Operating profit 78 62 116 109 77 105 44 45 Net-interest inc./(exp.) (11) (24) (35) (39) (39) (43) (29) (28) Assoc/forex/extraord./others 13 11 5 22 37 20 34 34 Pre-tax profit 80 49 87 92 75 82 50 51 Tax (3) (9) (22) (28) (21) (9) (12) (13) Min. int./pref. div./others 0 0 0 (10) (9) (18) (21) (21) Net profit (reported) 77 40 65 54 45 56 17 18 Net profit (adjusted) 70 18 24 (43) 32 11 17 18 EPS (reported)(USD) 0.110 0.049 0.071 0.055 0.046 0.019 0.006 0.006 EPS (adjusted)(USD) 0.100 0.022 0.026 (0.044) 0.033 0.004 0.006 0.006 EPS (adjusted fully-diluted)(USD) 0.094 0.020 0.026 (0.044) 0.033 0.004 0.006 0.006 DPS (USD) 0.015 0.000 0.000 0.000 0.000 0.005 0.005 0.005 EBIT 78 62 116 109 77 61 44 45 EBITDA 90 88 162 105 177 140 141 161

Cash flow (USDm) Year to 31 Aug 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 80 49 87 92 75 82 50 51 Depreciation and amortisation 12 26 50 60 71 79 97 116 Tax paid (5) (12) (12) (30) (17) (9) (12) (13) Change in working capital (52) (86) (137) (31) 7 238 (215) 4 Other operational CF items (21) (21) (48) (106) (37) (167) (35) 13 Cash flow from operations 14 (44) (61) (15) 99 223 (116) 171 Capex (289) (414) (289) (242) (327) (150) (150) (150) Net (acquisitions)/disposals 0 0 0 24 (18) (0) 1 2 Other investing CF items (31) 79 23 124 14 0 179 (2) Cash flow from investing (320) (335) (266) (93) (331) (150) 30 (150) Change in debt 347 200 251 (163) 249 (75) 0 0 Net share issues/(repurchases) (3) 115 95 0 0 210 0 0 Dividends paid (7) (9) 0 0 0 (15) (15) (15) Other financing CF items (0) (1) (2) 308 (17) 0 53 3 Cash flow from financing 336 305 344 145 232 120 38 (12) Forex effect/others (3) 3 (0) 5 0 0 0 0 Change in cash 27 (71) 17 42 1 194 (48) 9 Free cash flow (275) (458) (350) (256) (228) 73 (266) 21 Source: FactSet, Daiwa forecasts

Ezra Holdings (EZRA SP): 21 September 2015

Financial summary continued … Balance sheet (USDm) As at 31 Aug 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 187 116 133 176 179 373 325 334 Inventory 23 56 89 126 97 103 54 54 Accounts receivable 218 327 478 461 583 485 299 288 Other current assets 88 151 353 331 352 368 368 368 Total current assets 515 651 1,054 1,094 1,210 1,328 1,047 1,045 Fixed assets 613 1,003 1,167 1,346 1,594 1,836 889 923 Goodwill & intangibles 19 172 237 242 242 242 11 11 Other non-current assets 283 315 276 248 317 509 955 955 Total assets 1,431 2,141 2,734 2,930 3,363 3,914 2,902 2,934 Short-term debt 207 294 607 502 511 511 511 511 Accounts payable 121 290 359 394 487 632 184 177 Other current liabilities 38 36 61 69 86 86 86 86 Total current liabilities 366 621 1,026 965 1,083 1,229 780 773 Long-term debt 448 637 639 784 1,041 1,141 611 611 Other non-current liabilities 23 37 57 42 53 82 97 118 Total liabilities 836 1,294 1,723 1,790 2,177 2,452 1,489 1,502 Share capital 188 395 490 490 490 640 640 640 Reserves/R.E./others 405 451 521 601 640 565 495 493 Shareholders' equity 593 846 1,011 1,091 1,130 1,205 1,135 1,133 Minority interests 1 1 (0) 49 56 257 278 298 Total equity & liabilities 1,431 2,141 2,734 2,930 3,363 3,914 2,902 2,934 EV 584 864 1,250 1,272 1,502 1,417 969 981 Net debt/(cash) 467 815 1,112 1,110 1,373 1,279 797 788 BVPS (USD) 0.849 1.035 1.108 1.120 1.155 0.410 0.386 0.386

Key ratios (%) Year to 31 Aug 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 7.3 58.1 76.0 28.2 17.9 (4.2) (57.9) 0.1 EBITDA (YoY) 32.7 (2.0) 84.0 (35.0) 68.2 (21.0) 1.3 13.8 Operating profit (YoY) 23.8 (20.5) 87.9 (6.6) (29.4) (21.0) (27.0) 2.1 Net profit (YoY) (8.6) (73.9) 31.0 n.a. n.a. (65.3) 47.5 5.5 Core EPS (fully-diluted) (YoY) (26.4) (78.7) 31.1 n.a. n.a. (88.5) 47.5 5.5 Gross-profit margin 32.7 24.7 23.5 18.0 19.6 18.1 33.5 36.7 EBITDA margin 25.4 15.7 16.4 8.3 11.9 9.8 23.6 26.8 Operating-profit margin 22.0 11.1 11.8 8.6 5.2 4.3 7.4 7.5 Net profit margin 19.8 3.3 2.4 (3.4) 2.2 0.8 2.8 2.9 ROAE 12.4 2.5 2.6 n.a. 2.9 1.0 1.4 1.5 ROAA 5.9 1.0 1.0 n.a. 1.0 0.3 0.5 0.6 ROCE 7.4 4.1 5.8 4.6 3.0 2.1 1.6 1.8 ROIC 8.6 3.7 4.6 3.5 2.3 3.5 1.3 1.5 Net debt to equity 78.7 96.3 110.0 101.7 121.5 106.2 70.2 69.5 Effective tax rate 3.8 18.0 25.0 30.6 27.7 10.6 25.0 25.0 Accounts receivable (days) 212.4 177.7 149.3 135.8 128.0 136.6 238.4 178.4 Current ratio (x) 1.4 1.0 1.0 1.1 1.1 1.1 1.3 1.4 Net interest cover (x) 8.0 3.6 4.7 2.7 4.5 3.3 4.9 5.7 Net dividend payout 13.7 0.0 0.0 0.0 0.0 26.4 88.5 83.9 Free cash flow yield n.a. n.a. n.a. n.a. n.a. 28.1 n.a. 8.1 Source: FactSet, Daiwa forecasts

Company profile

Ezra Holdings is an integrated offshore services provider to the oil & gas industries. It operates across several oil & gas services segments through the 'EMAS' brand and listed associate TRIYARDS. Some of its services include subsea solutions to support offshore activities, vessel ownership and chartering services and vessel fabrication capabilities.

Ezra Holdings (EZRA SP): 21 September 2015

Ezra: 5-year historical PBR ratio Ezra: EV to EBITDA

2.0 40 35 30 1.5 25 20 1.0 15 10 0.5 5 0

0.0

Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15

Jun-15 Jun-13 Jun-14

Feb-13 Feb-15 Feb-14

Dec-14 Dec-12 Dec-13

Aug-12 Aug-13 Aug-14 Aug-15

Jul-10 Jul-12 Jul-13 Jul-14 Jul-11

Apr-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Oct-14 Oct-10 Apr-14

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Enterprise Value/EBITDA +1 SD P/B +1SD -1SD +2SD -2SD -1 SD Average Source: Bloomberg Source: Bloomberg

Ezra: negative free cash flow (USDm) Ezra: PPE growth 0 2,500 (50) 2,000 (100) (150) 1,500 (200) (250) 1,000 (300) (350) 500 (400)

(450) 0

2006 2007 2008 2009 2010 2011 2012 2014 2013

(500) 2005

YTD2015

2006 2007 2008 2009 2010 2011 2013 2014 2012 2005 Source: Bloomberg Source: Bloomberg

Ezra: SOTP valuation Parameters Enterprise Value (USD m) 1,301.3 New Assumptions Old Assumptions Offshore Support Services division 400.8 9.0x sector EBITDA 9.0x sector EBITDA Subsea Services division 327.7 9.5x sector EBITDA 9.5x sector EBITDA Marine Services division 572.9 9.0x sector EBITDA 9.0x sector EBITDA

Net Debt (USD m) 802.1 MI (USD m) 277.7

Significant listed associates' value (USD m) 21.1 Perisai Petroleum (12% stake) 21.1

Equity Value (USD m) 242.6 Equity Value (SGD m) 339.7

No. of shares assumed (m) 2,938.5

Equity Value per share (SGD) 0.116 Source: Daiwa estimates

Ezra Holdings (EZRA SP): 21 September 2015

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] IT/Technology Hardware (PC Hardware) Property (China) Christine WANG (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Banking (Hong Kong/China); Broker (China); Insurance (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] INDIA Power; Utilities; Renewables and Environment (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Saurabh MEHTA (91) 22 6622 1009 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Capital Goods; Utilities Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] SINGAPORE Transportation – Railway; Construction and Engineering (China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Jibo MA (852) 2848 4489 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Head of Custom Products Group Royston TAN (65) 6321 3086 [email protected] Thomas HO (852) 2773 8716 [email protected] Oil and Gas; Capital Goods Custom Products Group David LUM (65) 6329 2102 [email protected] Property and REITs PHILIPPINES Shane GOH (65) 64996546 [email protected] Bianca SOLEMA (63) 2 737 3023 [email protected] Small/Mid Cap (Singapore) Utilities and Energy Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

Ezra Holdings (EZRA SP): 21 September 2015

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, OUE Downtown 2, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

Ezra Holdings (EZRA SP): 21 September 2015

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report.

There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.

Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Ezra Holdings (EZRA SP): 21 September 2015

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 60.4% Hold** 26.0% Sell*** 13.6% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 June 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association