Posted by: donmihaihai | March 21, 2009

Look and feel like WorldCom

It was a misfortune to buy “Security Analysis: The Five Edition” in the early phase my trying as I ventured into stock investing. Making it worse was reading without any financial background. Last year, I found the five edition distasteful when re-reading as it have lost the soul earlier written by Graham and Dodd. The Six edition published in 2008 included introductions by current well-known valued investors make it a good read and with a CD version of the famous 2nd edition. While I have not venture into the CD, A case study of WorldCom written by Bruce Greenwald caught my attention because except for the name, size and ending, it is upright similar to another local listed company.
So here is the game, who look and feel like WorldCom? Before that, let see what was being written for WorldCom.
1) In mid 1999, WorldCom market value = USD$125 billion compared to a year-end 1999 book value of USD$51.2 billion. Over 85% of the book value was intangibles so ratio of Price to tangible net equity was in excess of 15.

2) Retained earnings for the company 15-years history were negligible, huge Book value was created by issuing of stock at premium for acquisition.

3) WorldCom was valued at extreme premium over Tangible book value while the company operates at competitive disadvantage in its industry with easy entrants.

4) From year-end 1999 to year-end 2000, PPE increased by 27% while revenues increased by 8%. While PPE was fraudulently inflated by booking expenses as investments, just ignore the fraud part and focus on huge expansion in face of decelerating revenues.

5) During 2001, short term debts almost disappeared as current debts liabilities fell from USD$7.2 billion to USD$172 million while Long term debt increased by about USD$12.5 billion and another more than USD$1 billion “disappeared” by deconsolidating the subsidiary responsible for that debt.

6) Lost control of it debts, seeking re-financing by selling equity and debts in the face of falling stock price justified the issue in terms of future earnings and cash flow.

7) Gone.

Except for the ending part, WorldCom can be easily replaced by EZRA just by changing the numbers with the main juice remain intact.

1) At its peak, EZRA was trading at around $7.20 in 2007 which gave it a market value of $2.1 billion and that was P/B of 5X using FY2007 shareholders equity. Since EZRA book value was mainly tangible at that time, EZRA was being valued at just 1/3 of WorldCom at it peak in term of valuation. But it should be noted that if all “other incomes” for 3 years while included 2007 was taken excluded, P/B will increased to 7X

2)EZRA is much better at point 2) retained earnings as it is not negligible — 25% of shareholders equity make up of past operating earnings. But depreciation and its likes are not being charge into the calculation.

3) OSV is well-known for it supply and demand cycle with entrant and exit being common, this is a competitive industry. And economies of scale is not relevant to EZRA, by growing or jumping yearly at fast rate, all its expenses increased/ jumped much faster. All expense/revenues — FY2003: 0.48, FY2004: 0.74, FY2005: 0.79, FY2006 : 0.85,FY2007: 0.88, FY2008: 0.89, 1Q2009: 0.83. Can I say dis-economies of scale for EZRA because other listed entities here are having reducing ratio due to increasing charter rate prior 2008(or let just say economies of scale).

4) For this point there is nothing much similar unless I play cheat. Instead of using one full year, let use one quarter – total Fixed Asset at FY2008 : USD$183 million, 1Q2009 : USD$257 million. Revenues 4Q2008 – USD$119 million, 1Q2009 – USD$113 million. After cheating, the results is even worse as total Fixed Asset increased by USD$70 million, 40% while Revenues was flatted.

5) Disappearing debts. EZRA does it in two ways.

i) EZRA deconsolidated one of its major subsidiary and that took USD$121 million debts against USD$3 million cash away from EZRA B/S as it accounted its ownership under associated company. EZRA netted USD$178 million from sale of shares.

ii) Sale and lease back. This is also effectively reducing the amount of debt because huge assets(vessel in this case) are seldom funded without debt. The use of Cash from sale for reducing debts or new assets does not change the reality that sale and lease back as operating lease is another way of “disappearing” debts and boasting book value down the road assuming charter earned cover operating lease and all kind of expenses. So debts taken off B/S and retained earnings boast B/S.

6) No

7) No

Ok game over. 5 out of 7 points. EZRA look and feel like WorldCom. I started to see highly of myself for providing such imaginative links. Joke aside, when I was reading the case study, I keep telling myself… well, just look like EZRA.

Before the story end, there are two important points to look into.

1st point : Operating lease.

While the form is operating lease, it can be look upon as debt with no interest and yearly repayment until the debt in fully repaid(lease period over). Whatever it is, the need is there for the entity to pay it dues whether or not it is the asset is being utilised or generating profit. Here is the unfortunate part as compare operating lease of vessel against rental or more stable kind of business of say retail or food court. If the vessel is not being chartered, the company is still required to fulfill its obligation while in retail or food court(food court is more stable in a sense), rain or shine, every day is business as usual. So the utilisation is 100% almost known before hand and the worry is whether sale covered all expenses.

In the case of EZRA, it has been said, or many are saying that their operating leases are backed by long term charter so cash will be flowing, vessels down time are minimum. But looking at FY2008 annual report, the number says otherwise

Lease commitment as lessee : FY2007 – USD$128 million, FY2008 – USD$215 million. Increased by 68%

Lease commitment as lessor : FY2007 – USD$40 million, FY2008 – USD$92 million. Increased by 130%

Offshore support services – Sale : FY2007 – 110 million, FY2008 – USD$177 million.

Ezra do own vessels so I don’t know the exact ratio of owned vessels vs lease vessels, but it is not unthinkable to say a big portion of the lease commitment(as lessor) belong to their own vessels. Now let say the entire USD$92 million belong to the operating lease, it is still too little, to inject confident that what being said are true, both numbers must at least about the same. To be safe, take a 150% of USD$215, committed lease as lessor should be USD$323million as one is expenses while the other is revenue. Currently, expenses are >2X bigger which is not a good sign consider the obligation and what was being said.

It is also worthwhile to note that committed charter at end FY2008 is just 52% of OSS sale. That mean while the remaining leases term is 1 to 24 years, on average it is just six months or even shorter. Not a good sign. While EZRA will always hunt for more long term lease for its vessels, at this point of time, with charter rate going down month by month after moving up for years, how many operators will want to lock in a long term lease at the current rate knowing that it is going to drop more. Anyone that isn’t drunk or seasick will go for short term lease.

Of my 4 “pet OSV companies”, Swiber and CH Offshore does not show operating lease under lessor in their annual report. It is worthwhile to ask why they are not there or the lease terms are too short to be considered which I don’t know. So only Jaya now.

Lease commitment as lessor : FY2007 – SGD$106 million, FY2008 – SGD$124 million.

Lease commitment as lessee : Nil

Offshore shipping – sale : FY2007 – SGD$69 million, FY2008 – SGD-71 million.

Mud will be throw at me when I compare Jaya and EZRA but Jaya has longer average committed operating lease of 18 mths in FY2007 and 20 mths in FY2008 compare to EZRA of about 4 to 6 mths in FY2007 and FY2008. While 50% of the operating lease will be gone if “purchase options” are exercised for Jaya. Committed leases from Jaya and EZRA tell a story about this industry. It usually works on short term lease and long term leases are rare.

2nd. Guarantee related or 3rd parties debts

While the form suggests no cash outlay or debts being taken for corporate guarantee, there are other ways to look at it. At best it can be considered as giving the bank a “call option” exercise anytime by bank or worse debts that required neither payment of interest or principle until bank start calling the option or end of the loan. So in theory, everything is in the hand of the bank. But a closer look will suggest that guarantee is there in the first place because of weak financial status of an entity that required the backing of a stronger entity before bank is willing to learn. Then, guarantee is “call” only when 1 or both entities financial position weaken. So as EZRA guarantees its associated EOC USD$133 million of debts, it will be prudent to know that EZRA has USD$133 million of cash or at least its assets and cashflow has the ability to come out that USD$133 million on top of its own requirement. If not, there is a risk of engine stalled and crashed in seconds.

On EZRA and EOC, accounting standard suggested that EOC can be treated as associated and consolidate with equity method, reality suggest otherwise due to the fact that EZRA guarantee a huge sum of USD$133 million of EOC debts. Actually accounting standard give company the freehand of using associated or subsidiary under the idea of “control” i.e if EZRA has control over EOC, even if the ownership is less than 50%, EZRA can still consolidate EOC into their financial statement. For investors, we have an easier task, take away all kind of strings, one question is required — what is significant? Considering size, cashflow, etc — the guarantee of USD$133 million of an associated is obverse significant.

Ok time out.





  1. Gd analysis! Although u are flattering Ezra by comparing it to worldcom.

    The OSV bubble has blown and only the strong and prudent will survive.

    Lionel Lee of Ezra was too ambitious and now has to scramble to cover his backside

  2. While I looks like throwing shits at EZRA, EZRA is still innocent until proven otherwise. That say EZRA is no WorldCom which was managed by crooks. Being too ambitious is not crook and by comparing them to WorldCom I feel like downgrade EZRA too much… Anyway it is just a “game”

  3. Donmihaihai,

    From your comments on my blog, it appears that you labelled Ezra as “guilty unless proven otherwise”. I am serious and this is not a joke. The frequent mud-slinging and comparison with the now busted Worldcom obviously points to you having a big axe to grind with respect to Ezra. You claim that it’s no crime to be ambitious and yet in your article you studiously compare Ezra using 7 points to Worldcom and conclude that 5 out of 7 points are similar. Sometimes I wonder if it is ingenuity or just selective perception which causes you to forge linkages from A to B even if there are none. Sort of like seeing patterns amid historical charts of stock prices even when these are seemingly random. Just an analogy.

    And I also wonder if you are over-analyzing on aspects which should not even be analyzed in the first place ? At first glance it looks really impressive as you run through the numbers with a fine-toothed comb and quote many figures from multiple annual reports to justify your conclusions. But then I realize that since you don’t know stuff like the mixtue of owned vessels to leased vessels, may I know on what basis are you concluding all these things which you have concluded ? It’s a bit like trying to build sandcastles in the air out of thin air. Over-analysis can lead to paralysis (mind the pun) and for this post of yours (ok not just this one but some other previous ones as well) it seems that you have gone quite overboard on the analysis and thrown in a lot of “maybes” and “assumptions” to bolster the facts.

    I see your knowledge of OSV must be pretty good and you must have quite a bit of knowledge about the industry as you can tell that rates are going down and companies like Ezra cannot sustain high utilization on their vessels. Incidentally, their vessels DO have back to back contracts and for EOC as well, and most of these charters are for 3-5 years though some are for 2 years. At least there is clear revenue visibility, and they have also scaled down their capex requirements.

    Ultimately, as a shareholder, you HAVE to believe the companies are reporting the right numbers. If not, I can argue Celestial, Jaya and other companies you own may also be secretly coking their books. It is quite impossible (I believe) fo a shareholder to uncover fraud just be analyzing the financial statements. But if you can do it then you will probably stand out as one of the few “vigilante” investors who is as detailed as Benjamin Graham, of which I will take my hat off to.

    I would also like to ask one question: I purchased Ezra with a margin of safety should the OSV market collapse and all their customers not pay. I believe I have paid a fair price (not excessive like $2 to $3 post-split) to own part of the company, and have been a shareholder for 3 years. Yes, I do amit there are a lot of accounting gizmos being used to lighten the Balance Sheet and raise cash, e.g. the sale of 51.1% of EOC in 2007 and the S&L transactions. This does NOT imply the figures in the financial reports are cooked. It may simply be a case of accounting entries not showing the full picture unless you see the Notes or see the detailed consolidation worksheet and computation of the underlying numbers. Right or wrong ? Your view, from how you post, is that you can analyze ALL aspects of a company from its numbers. But I say this view is flawed.

    Strangely too, I don’t see any other aspect of analysis for either Ezra or your companies besides mainly the numbers. How about customer profile, supplier strength, pricing power, Management experience, barriers to entry and such stuff ? Shouldn’t these be factored into the valuation of a company ? If you go by pure numbers then it can end up being very unrealistic as a company is much, much more than just the numbers. It would be foolish to kid yourself that one can ascertain the value of a company from its numbers alone, or the lack of good numbers.

    So I am hoping you can be more civil and stop over-analyzing. I do a basic analysis for Ezra every half-yearly and look at the 3 basic statements, as well as review the Annual Report when it is out. It is a known fact that they are gearing up for their vessels and their D/E ratio will increase – would you need to know every single minute detail ? The Company has already provided the numbers on interest coverage, D/E and Current Ratio. So unless you doubt all these numbers or need to know how to obtain them, otherwise perhaps you can just learn how to chill.


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