Core operations performs well. Ezra Holdings (Ezra) reported its 1Q09 results with revenue leaping 1.5x YoY to US$113m but PATMI registered a 93% decline due to a one-off divestment gain recorded in the previous quarter. Stripping the divestment gain, Ezra gave a laudable performance with PATMI rising 2.6x to US$9.3m. Along with bettering our forecasted charter rates, the strong performance was boosted by lumpy contributions from its Marine Services and new Energy Services divisions.

Explaining the slimming margins. But the good topline performance came with a slimmer overall gross margin. Its main chartering business saw a fall in margins as new vessels were taken on its books as compared to previous sale-and-lease back arrangements, translating to an accelerated depreciation. Marine Services registered slimmer margins due to milestone payments of less lucrative non-turn key projects. We expect this division's margins to average 18% on an annual basis.

EOC disappoints. We initially had strong hopes that this business will serve to lift Ezra with its good margin construction/maintenance business. However, EOC's thin asset base of four large vessels was in transition between contracts, resulting in lower charter revenue. Exhibits 1 & 2 show the changes in charter contracts and it is reflective of a challenging landscape where contracts are not as abundant and charters terms are not as long. Therefore, we have softened EOC's contribution to Ezra by 26% for both FY09F and FY10F. While EOC will take delivery of another barge in 4Q09, we hold our forecasts as we take pensive stance for clarity in charter terms.

Swing factors for earnings. While visibility for its offshore support vessel business is slowly crystallising for 2009, Ezra's contribution from its lumpy Energy Services division and EOC could cause Ezra's earnings magnitude to vacillate. We have maintained a conservative stance on both these divisions and will tweak our estimates as we gain better clarity. Forex risks can also contribute heavily to the swing (See exhibit 3).

Maintain BUY. We have tweaked our earnings model and raised the PER valuation for Ezra's core business to 6x (prev. 5x) FY10F EPS as it demonstrates resilience in charter rates. Conversely, we lowered EOC's valuation to 4x (prev. 5x) FY10F EPS as we remain pensive on its long term contracts. We maintain BUY with SOTP fair value of S$1.09 (prev. S$1.16).