EMAS Offshore Limited

EMAS Offshore Limited ("EMAS" or the "Company) is formerly know as EOC Limited. It has a primary listing in Oslo and the information is here. The secondary listing is in Singapore. The original term sheet is here and you can see that it is listed at the highest end of the valuation range.

Principal activities

EMAS is an established offshore oil and gas services provider which offers offshore support, accommodation and offshore production services to customers in the oil and gas industry.

The Company believes the core competitive strengths are:

• Leading offshore services provider with one of the youngest and largest OSV fleet in Asia Pacific
• Global reach with blue chip clientele
• Integrated offshore solutions group with first mover advantage in high-growth markets
• Experienced management team

Share offering

EMAS is offering 48.585m shares and the offering comprises of 11.1% of is outstanding share capital. 39.5m shares will be via placement and 9.085m shares via the public tranche at $1.21 per share.

The Company is also selling up to US$20m secondary shares to its existing shareholders for "anti-dilution" purposes.

There will also be an "over-allotment" option but frankly i will be very surprised if this is activated as the placement suffered from low demand during the book-building period. I am not sure what has transpired since then.

The offer will end at 12pm on 2 Oct and commence trading on 8 Oct 2014 at 9am.

Financial Statements

Revenue has been declining drastically from 2011 to 2013 from US$178m to US$43m. They have managed to jack up current year to date earnings to US$51m through "other operating income" in the likes of a sales and leaseback.  I don't like the look or smell of it.

From the cash flow statement, you can see that EMAS generated its cash from investing activities for 9M 2014 rather than from its operating activities, which is experiencing negative cashflows.

Pro Forma statement

The Company produced a pro-forma statement as if the business combination occurred.

I am not sure how much of the profit is recurring and how much expenses are one-off. It is really not too clear to me. Assuming the EPS will be around US 15 cents x 1.25 = Singapore 18.75 cents. Based on the IPO price of $1.21, the PE is around 6.4x. If i looked at the gross profit alone, i will be alarmed. The primary business revenue has deteriorated badly over the years!

Financial Restructuring

Ezra has done this many times. For example they spin out Triyards, they list EOC on Oslo and then do a sales and leaseback and now a secondary listing in Singapore! I am not really a fan of such financial engineering stuff!

Other News

The family behind EMAS recently settled a divorce suit. The news is here.

Valuation

If this is a secondary listing, it may be a good idea to know what existing investors at the primary market is valuing the company. It last traded on 30 Sep at NOK 5.10 and that translate into S$1.01 (versus the listing price of $1.21). Investors will probably be better off buying from the primary market in Oslo.

The peers however, seemed to be trading at higher valuations in SGX where even Ezra is trading at higher valuations.

My views

I don't really understand why the demand for the shares are so weak. It is probably investors (like myself) don't truly understand the Company. Given that the primary listing is trading at a 16.5% discount to the secondary listing price, investors are truly better off buying the existing shares than subscribing for the IPO (i am not sure if arbitraging is possible). 

If this is a primary listing in Singapore for the first time, i may given it a thumbs up given how i appraised Pacific Radiance back then but this bullish stance was somehow dampened by how PACC Offshore Services performing badly post IPO.

I will give it a zero chilli rating given the weak market sentiments, the financial engineering mindset and the fact that existing shareholders are valuing it lower in the primary listing venue in Oslo than in Singapore. I am sure Ezra has listed it there in the first place because Norwegian investors may appreciate such oil and gas assets better. 

Happy IPOing

Heidar's view

In case you don't know, the good thing about this secondary listing is that i have new friends from Norway. ^_^. This is the detailed analysis which he has emailed me on 3 Sep 2014. I copy and paste here for your kind reference on how Norwegian investors viewed EMAS. He have definitely done a more detailed analysis than me but do note the email and the analysis is not updated.

For us Norwegian investors EOC was a very complicated, but interesting, company to understand. This was because of them not communicating clearly enough and also because of their relationship with Ezra and the different "internal" transactions with Ezra and Perisai Petroleum. I won't delve very deeply into how the current state of affairs came to be, but will give an outline of the current status of EOC (not including the changes). In the attachements I have included an english summary of the history and changes to the company written a couple of months ago. Thus it does not include the sale and leaseback of the Lewek Champion.

EOC owns fully two accommodation work barges, the Lewek Chancellor and Lewek Conqueror, which are on bareboat charters until 2015 and 2019 with additional options. They own 50/50 with Perisai one accommodation barge with heavy lift and pipe lay capability, the Enterprise 3, which has just finished maintenance and is being tendered out. They also own two FPSO vessels, the Lewek EMAS which they own 42% of, and the Perisai Kamelia which they own 49% of (Perisai owns the rest). They are on charters until 2017 and 2016 with additional options. Additionally they lease with repurchase right a vessel they sold in february, the Lewek Champion. It is on a charter until 2019, but they have only a marginal net revenue from the vessel between the lease cost and charter revenue. 

Additionally EOC owns 144661000 shares in Perisai Petroleum, or 12,1%. The management of EOC and Ezra views this as a strategic investment (it's booked as a investment held for sale, but disregard that) because, in their own words, the Malaysia market is mainly operated by preferred "national" companies, and Perisai holds this status. Thus the rest of the EMAS companies gain a foothold in the oil service segment in Malaysia through their controlling share in Perisai. 

The key figures for EOC were an equity of 238mUSD and a market cap in Oslo of around 110mUSD (111 mill shares) before the proposed transaction. In many ways it's fair to say that EOC was underpriced, but this was mainly due to low sector pricing of supply on the Oslo Stock Exchange, scepticism of Ezra as main owner (they used to own 45%) and the fact that EOC did not want to pay out dividends and instead focusing on investments into more accommodation barges.

So that was the earlier situation for EOC. On July 10. they released the announcement that EOC was to buy the Offshore Support Services part of Ezra, which essentially is everything apart from their subsea business and Triyards. 

The total cost for EOC is 520mUSD, which will be payed partially in shares and cash. 150mUSD is to be payed in cash, and 370mUSD is to be payed through the allotment of 280 million new shares for Ezra, which give the alloted shares a value of 8,18 NOK or 1,65 S$ each. This is about 0,18 S$ above the current share price in Oslo. 

To raise the cash for the transaction and also for other capex needs (investment in three new additional ships for example) they are planning on an additional listing in Singapore where they will try to raise about 250 mUSD in cash. The central question for us in Norway is what share price they will manage to get in the IPO, and thus how many shares they are alloting. 

In return EOC acquires the OSS business in Ezra, which consists of 44 owned or leased (with purchase right) vessels, management structure and a consulting department. The 44 vessels are a mix of 24 AHTS, 7 AHT, 10 PSV, 2 Barges and 1 Accommodation and Construction vessel. The AHTS/AHTs are divided into 15 vessels smaller than 8000bhp and 16 larger than 8000bhp. The utilitization rate has been between 80-90% since 2011, and the average age is about 6 years. They also claim to have a very strong capability in deep water supply. The equity value of OSS is 396mUSD, but they have options to repurchase the leased ships that according to RS Platou (Norwegian ship broker) has additional value not recognized in the book value. The market value of the leased ships are 405mUSD, but their book value is recorded at 174mUSD, giving an option value of nominally 230mUSD. The reason for this according to the management of Ezra is that the repurchase price was determined as a % of purchase cost adjusted by future depreciation, and the ships were built in Asia. Since their purchase the price for these kinds of ships has increased a lot and the market for them has become mor globalized, meaning that it's easier now to sell an Asian ship to the European market. Thus the total P/B of the OSS in the purchase is 1,31 and the P/RNTA is 0,71 (this also includes market value for the owned ships). 

The combined EOC will have an equity of 736mUSD, and a total of around 600 mill shares depending on the issue price in the IPO. Thus the P/B 1 price is around 7,6 NOK or 1,535 S$. The company will have interest bearing debt of 562mUSD and a NIBD of 412mUSD. This gives dem a debt/equity ratio of 0,76 and a NIBD/equity ratio of 0,55. They are planning to grow further, so an increase of debt is to be expected. The pro forma profit for the combined company in 2013 was 80,7mUSD, but this is including 49mUSD in other operating income, mainly relating to sale and leaseback of vessels. Thus the ROE of the company for 2013 with 736mUSD in equity is 4,3% ex other operating income. On a run rate basis for 2014 they will make 90mUSD with other operating income of 50mUSD, giving them a run rate ROE ex other operating income of 5,5%. It is important to note that 100mUSD of the equity will be invested in three new vessels that have not made an impact on these revenue figures, and it is also important to note that the old EOC ships were not fully operational in 2013 and 2014 so far, Ezra have written that this is also the case for the OSS vessels in that period. In my meeting with them the management also held the belief that the combined company would enjoy synergy benefits that would improve the combined bottom line. For example the combined administrative expenses will go down compared to costs for the two separate entities. Another synergy benefit is that the OSS has a loan interest rate 1-2 percentage points below that of the old EOC, and the combined company would be able to refinance the companies entire debts on terms matching OSS old ones, thus reducing combined financial costs. Oh, and by the way, their accounting year begins in september, meaning that we are in 2015 now according to their accounts.

Concerning dividends it is important to note that EOC has not previously payed a regular dividend (for a very long time). The management of Ezra claimed verbally that as they moved the OSS out of their core business they lost a significant source for working capital, and were thus dependant on the new EOC paying a healthy dividend. They would not however specify what percentage of the result would be allocated as dividend. 

In this article http://www.financeasia.com/News/389569,eoc-pre-markets-singapore-ipo.aspx the journalist claims that Ezra has advertised the combined company at a valuation of 1 bUSD, equaling around 10NOK or 2 S$ with 600 mill shares. This implies a PB ratio of 1,36. Do you think they can get such a price in the IPO, or do you deem that unlikely? If you have any information or opinions on the market sentiment for supply companies in general and Ezra in particular in Singapore/Asia right now I would greatly appreciate the input. Really any information you might have regarding the the IPO and the possible valuation of it would be greatly appreciated.