Ezra Holdings to issue SGD dominated perpetual securities

Considering issue of perpetual securities. Ezra Holdings (Ezra) recently announced that it is considering an issue of SGD denominated perpetual capital securities. Further details (if any) will be released at a later date. This comes on the heels of Hyflux's successful perpetual preference shares offering this year; recall that Ezion Holdings also announced in Aug its intention to issue SGD denominated perpetual capital securities.

Likely impact of issue. We estimate the issue to be around US$100m, though details are not firmed up yet. Assuming a yield of 6% p.a., this would mean about US$6m in preferred dividends per year, affecting the amount of free cash flows to common equity holders (dividends paid out this year was US$9.2m). However, the issue of such a hybrid security may be non-dilutive in terms of earnings and should the funds be used to repay debt, interest expense may even be lowered, benefiting the bottom-line.

Low interest rate environment, but nervous investors. Hyflux's issue in Apr this year had a yield of 6%, while Ezra's US$50m convertible bond that was issued to Aker Solutions in Mar had an interest rate of 5%. Cheung Kong's recent S$500m senior perpetual bond was priced to yield 5.125%.

The low interest rate environment has meant that investors are increasingly searching for assets with higher yields; however with the heightened risk aversion, we believe that nervous investors are likely to only accept highgrade assets from companies that are able to weather any looming crises, especially if the securities are "perpetual" in nature.

Not a "must-do" kind of deal. We believe Ezra sees the issue as an "opportunistic" deal given a narrowing spread between the cost of capital of senior debt and such hybrid securities. We understand that there is no specific purpose for the funds (e.g. to buy a new vessel etc); we believe that any funds, if raised, could be used for debt repayment or for general working capital.

Recall that Ezra is aiming for a US$1b order book for its subsea division, and the undertaking of projects will require significant working capital as well. Meanwhile, given the recent sell-down in the broad market and the unfavourable macro set-up for high-beta stocks, we lower our peg for the offshore marine business to 13x (prev. 14x) and update the market value of the group's listed entity in our SOTP valuation. This reduces our fair value estimate to S$1.55 (prev. S$1.87). Maintain BUY.