Posted by: donmihaihai | December 16, 2009

Amazing EZRA

More can be learnt by reading EZRA annual report 2009 than reading other reports. Reminding myself — remember to read 2010 annual report.

Intangible Assets

 

Various companies do it differently. Sarin capitalised “R&D development cost” for products that are commercial viable, HTL capitalised “computer softwares licenses and development costs”, Qian Hu has “Trademarks/customer acquisition costs” & “Product listing costs” and REC has “student acquisition cost”. Not to be outdone, EZRA has “Customer contract and relationships” which come together with the acquisition of Telemark Limited.

That is a small amount(USD1.8million, amortised over 1 to 5 years), no big deal but it seems like more and more companies are keen to put down all kinds of intangible assets other than goodwill. Nevertheless, it is interesting to know that EZRA revised FY2008 financial statement for this transaction in the latest Annual report. If I am doing their accounts, I will put these into goodwill, as goodwill is subjected to impairment while amortisation is required for this intangible asset. But I may be naive…

Lastly, it is also interesting to note that:

1) According to the notes, EZRA paid almost 5X NBV for Telemark Limited if Goodwill and intangible assets are taken away.

2) This transaction took place in Apr 2008 but I believe it was revised in FY2009. The best part is Telemark is being paid in 5 payments spanning 4 years with EOC shares. While Telemark was consolidated as 67% subsidiary in FY2008, it was being treated as wholly owned subsidiary in FY2009 despite as far as I can see, EZRA does not totally owned it yet. So the tricky parts are —– did EZRA overstated earnings? What percent was being accounted for EOC when using equity method? How profits being share?

3) This is a beautiful transactions/acquisition with profits inflow with no cash outflow as EZRA use their associated company shares as currency.

4) What business is Telemark Limited in? I don’t know. Never said, can’t be trace. It is being stated as “investment holding company”. But I can’t find any subsidiary under this holding…. which mean all activities are at holding level?

Charter contracts

 

EZRA total lease agreements for charter of their vessels dropped from USD92 million in 2008 to USD23 million in 2009. While their OSV earned income of USD177 million and USD192 million in FY2008 and FY2009 respectively. Well these lease agreements are those charter contracts that being put out by EZRA through their announcements and loved by analysts or investors. BUT there is one main difference that is the number, USD23 million recorded in 2009 annual report is being “non cancellable leases” while those “lovely announcements” with multi-hundreds millions charter contracts are consisted of “renewable charter options for a number of years”.

So isn’t it amazing that a company that “try” it very best to has income backed by long term contracts has only less than 2 months of non cancellable charter contracts?

It is even more amazing that this company has charter contracts liabilities for 13 vessels on long term contracts thru sale and lease back of USD$269 million. This is a ratio of almost 1: 12. What if those renewable charter options doesn’t materialise or materialised at charter rate way lower? In a simple way of saying, EZRA has no choice but to keep paying those contracts no matter what happened in the future but their customers has a choice on whether they want to continue or not.

Lastly, on those contracts won(not just EZRA, nowadays almost every company love to announce contract won), before trying to analysing those contracts to dead on margins, earnings growth and ROE. There is one thing call proportion. For a company like EZRA with charter income of USD192 million and total revenues of USD$331 million, it must at least win USD192 million worth of contracts per year to stay even. If it wins a USD1 billion of non cancellable contract, then I will be interested because that is 5 years of revenues.

A permit to explore drilling activities in the territorial water of New Zealand

 

The value of this permit is unknown but stated clearly that it is valuable as in excess of USD75 million. But why it is not being openly communicated out to investors and only to be hidden at a small side note? That is because EZRA can only get that permit if their customer in New Zealand unable to pay EZRA the balance of USD75 million. So is this permit still valuable? I don’t know but the below number tell a different story.

Revenues : Offshore Support Services – 2008 – USD177Million, 2009 – USD 192 Million.

: Marine Services – 2008 – USD 64 Million, 2009 – USD 93 Million.

: Deepwater Subsea Services( Energy Services) – 2008 – USD 29 Million, 2009 – USD 46 Million.

Receivables : Offshore Support Services – 2008 – USD44Million, 2009 – USD 58 Million.

: Marine Services – 2008 – USD 21 Million, 2009 – USD 52 Million.

: Deepwater Subsea Services( Energy Services) – 2008 – USD 29 Million, 2009 – USD 75 Million.

EZRA receivables problem is already well known. I don’t know why their external auditor does not express an opinion of concern on this matter. As from the number, EZRA has never collect any significant amount from the Energy Services segment which now called Deepwater Subsea Services since it started about 2 years back. In fact, from the number, EZRA has only one customer (or few customers holding on to one permit) in this segment operating in the territorial water of New Zealand. 40% of total receivables belong to this customer. Since this is a new segment, I don’t see how it fitted into historical collections experience.

The Group deals with customers who are mainly creditworthy oil majors or their preferred service providers. Based on historical collections experience, the Group believes that no further allowance for doubtful debts is necessary in respect of certain trade receivables which are not past due as well as certain trade receivables which are past due but not impaired. Additional credit risk assessment has been disclosed in Note 40.

 

Included in the Group’s trade receivables of more than 120 days is a balance amounting to US$75,077,000 (2008: US$29,534,000), where the Group has the right to a permit held by the debtor to explore drilling activities in the territorial waters of New Zealand. The proceeds arising from realisation of this permit is expected to be in excess of the balance receivable.

There are many questions on this segment, this customer and these receivables. Even if they are being repaid, the sour taste will still last for a long time.

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Responses

  1. Stay clear. Stay clear. Make room for another dud in his prized collection.

  2. not sure whether it’s deliberate, but it’s ‘amazing’, not ‘amasing’.

  3. My mistake. Thanks

  4. E&Y is their auditor,but seriously i don’t trust any of the big 4 out there.

    notice lee kian soo is selling his shares. looks like lionel lee’s castle will collapse like dubai. i predict a oil price collapse to trigger ezra’ failure.

  5. Dear cy,

    Pls leave out the obvious — who is the auditor

    And pls keep all your predictions to yourself…

    Lastly, try not to comment on every post unless it lead to a good conversation.

    Thanks


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