Ezra’s 1Q13 earnings worse than expected

Huge tax charges are to be blamed.

According to CIMB, Ezra Holding’s 1Q13 core EPS forms 8% of its FY13 estimate (46% below forecast and, consensus), dragged down by higher-than-expected taxes.

Here’s more:

We cut our FY13-14 EPS by 5-7% for higher tax charges. Our target price, still at 12x CY14 P/E (5-year mean of small/mid-cap industrials), dips accordingly. Catalysts could come from a stronger 2H13. Higher taxes We expect lumpy tax charges for 1H13, factoring in the effects of withholding taxes and higher taxes from projects executed in countries with higher tax jurisdictions.

In 1Q13, Ezra incurred tax charges of US$5.9m, comprising US$2.9m of withholding taxes and US$3m of corporate tax at 21%. Management expects tax rates to normalise to 15-20% in FY13 with lower-tax-rate projects in the coming quarters. We raise our tax rate to 20% from 15%. OSV surprised nicely, subsea stable OSV’s gross margins were 24% (18% in 2H12). Utilisation was above 90%.

We believe the improvement stemmed from a restructuring of certain contracts and a slight increase in rates renewed. We upgrade FY13 gross margins to 24% from 22%. Subsea utilisation was 80%, affected by downtime in Dec due to the winter weather. Gross margins dipped to 15% (4Q12: 18%).

However, we expect a pick-up with more projects executed. We have assumed a 20% gross margin for subsea for FY13. Subsea order book is US$950m with US$415m of new contracts YTD, in line with our US$900m order target. Expect stronger 2H13 Ezra is trading below its 5-year mean of 16x forward P/E. We expect 2H13 to be stronger with the execution of more projects.