Ouch! I just lost $33K on Triyards after it got suspended last month. Triyards is a shipbuilder and a subsidiary of Ezra, which is now under Chapter 11 bankruptcy protection. By right, if you read my post on My Upstream Oil & Gas Rescue Operations, ship and rig builders have not seen the worst of the Oil & Gas (O&G) long and harsh winter and I should not have invested in Triyards in Mar this year. However, Triyards has successfully diversified away from the O&G sector. Among its new orders for the financial year ending in Aug 2016 are chemical tankers, research vessel, passenger ferries, river cruise vessel, wind farm support vessels, etc. New contract wins in such non-O&G vessels totalled USD226.2M in FY2016. Including O&G vessels, total contract wins represent 84% of the revenue in FY2016. The orders-to-revenue ratio is an important metric for me when investing in O&G stocks, as described in Oil & Gas, Show Me the Orders!
Given its success in diversifying away from the O&G sector, Triyards is similar to another ship builder, Vard, which has also diversified away successfully and was the subject of a voluntary cash offer by its parent company in Nov 2016. However, unlike Vard, Triyards' parent company, Ezra, is not in any financial position to offer a cash offer. Nevertheless, Ezra had pledged all its 60.9% shareholding in Triyards equally to both DBS and OCBC in Jul 2016. Any sale of the shares to recover the loans by any one bank would have triggered a mandatory cash offer. When I first bought into Triyards at $0.288 in Mar, its net asset value was USD0.673 as at end Feb 2017. Its debts were USD187.9M, translating to a debt-to-equity ratio of 0.86, which was very high. However, most of the debts were used to finance working capital and trade receivables were USD238.6M. When the bills are collected, there will be cash to pay down the debts.
On 19 Mar, Ezra announced Chapter 11 protection under US laws, instead of the usual judicial management under Singapore laws, which means that creditors cannot foreclose and sell the assets pledged to them. In other words, both DBS and OCBC cannot sell Ezra's Triyards shares to a third party except with the approval of the US courts or consent by Ezra. Since the banks could not sell off the shares, there would be no cash offer, at least not in the near term.
Upon Ezra's bankruptcy protection, Triyards disclosed on 21 Mar that it had approximately USD41.5M exposure to Ezra, mostly in the form of joint corporate guarantees. This represents 19% of Triyards' equity, reducing the net asset value to USD0.545. In Triyards' 3Q2017 financial results announcement, it announced another USD45.1M in impairment losses. As at end May 2017, the net asset value was reduced to USD0.478. Including the exposure due to joint corporate guarantees of USD38.5M mentioned above, the net asset value would be USD0.359. Ezra was a huge body blow to Triyards, but not fatal. Triyards itself was not under Chapter 11 bankruptcy protection and continued trading on SGX despite Ezra's troubles and trading suspension, until 4 Sep.
Given its success in diversifying away from the O&G sector, Triyards is similar to another ship builder, Vard, which has also diversified away successfully and was the subject of a voluntary cash offer by its parent company in Nov 2016. However, unlike Vard, Triyards' parent company, Ezra, is not in any financial position to offer a cash offer. Nevertheless, Ezra had pledged all its 60.9% shareholding in Triyards equally to both DBS and OCBC in Jul 2016. Any sale of the shares to recover the loans by any one bank would have triggered a mandatory cash offer. When I first bought into Triyards at $0.288 in Mar, its net asset value was USD0.673 as at end Feb 2017. Its debts were USD187.9M, translating to a debt-to-equity ratio of 0.86, which was very high. However, most of the debts were used to finance working capital and trade receivables were USD238.6M. When the bills are collected, there will be cash to pay down the debts.
On 19 Mar, Ezra announced Chapter 11 protection under US laws, instead of the usual judicial management under Singapore laws, which means that creditors cannot foreclose and sell the assets pledged to them. In other words, both DBS and OCBC cannot sell Ezra's Triyards shares to a third party except with the approval of the US courts or consent by Ezra. Since the banks could not sell off the shares, there would be no cash offer, at least not in the near term.
Upon Ezra's bankruptcy protection, Triyards disclosed on 21 Mar that it had approximately USD41.5M exposure to Ezra, mostly in the form of joint corporate guarantees. This represents 19% of Triyards' equity, reducing the net asset value to USD0.545. In Triyards' 3Q2017 financial results announcement, it announced another USD45.1M in impairment losses. As at end May 2017, the net asset value was reduced to USD0.478. Including the exposure due to joint corporate guarantees of USD38.5M mentioned above, the net asset value would be USD0.359. Ezra was a huge body blow to Triyards, but not fatal. Triyards itself was not under Chapter 11 bankruptcy protection and continued trading on SGX despite Ezra's troubles and trading suspension, until 4 Sep.
The company that has a bigger impact to Triyards has a name that also starts with "Ez", but it is not Ezra, it is Ezion. On hindsight, Ezion is a major customer of Triyards, much more so than Ezra. Ezion subscribed to 29.5M warrants in Triyards at an exercise price of USD0.563 in Jul 2015. One of the conditions for the issue of warrants to Ezion is that Ezion enters into shipbuilding contracts with Triyards worth at least USD150M. Based on outstanding order book of USD422M as at Oct 2016, this represents 36% of Triyards' order book. On 23 Feb 2017, Ezion announced that it had indefinitely deferred delivery of 4 service rigs worth USD270M to reduce capital expenditure. A cross-check between Ezion's and Triyards' announcements of contract wins in 2014 suggests that 3 of these orders worth a total of USD162.5M are Triyards'. That means USD162.5M of the outstanding trade receivables of USD230.0M could not be collected, dealing a serious blow to Triyards' cashflow. Triyards' 3Q2017 financial results also suggest that banks, despite "owning" 60.9% of Triyards, have grown cautious about providing further loans to it. On 6 Sep, Triyards suspended trading of its shares.
Triyard's problem is similar to Keppel Corp's and SembMar's problem with Sete Brasil, which had deferred offers and stopped payments. Keppel Corp and SembMar survived, because of strong backing of their parents, Temasek, and continued support of their banks. Triyards have neither, and its chance of surviving is a lot lower. For Triyards to survive unscathed, either its banks continue to provide financing to complete the ships ordered by other customers, or Ezion takes delivery of some of its ships, so that Triyards can convert the receivables into cash and pay off the debts.
Actually, I also did not expect Ezion to go into restructuring. Ezion's market capitalisation was one of the highest among the mid-cap O&G stocks before it was suspended on 14 Aug. In fact, I had just bought into Ezion warrants just before it was suspended.
Triyards is the biggest loss on a single stock. The lessons I learnt from this episode is to know your customers really well!
At least you declare the loss unlike others who kept quiet.move on.
ReplyDeleteYup, moving on. Life and investing don't stop there.
DeleteLarge losses is part of investing across market and economics cycles. We learn to be wiser at the next cycle.
ReplyDeleteYup, losses are part and parcel of investing. We either gain money, or gain knowledge.
DeleteIt takes a lot of courage to admit to your losses public ally. I really respect you for this.I hope you will pick yourself up from the loss and move onward.
ReplyDeleteNonetheless, isn't it too early to confirm on your losses on Triyard? I am unfamiliar with shipping / O&G industry but if the company is under liquidation, there might be some money left over after paying off its debtors.
No worries, losses are part and parcel of investing.
DeleteYes, perhaps the story of Triyards hasn't ended. A lot will depend on the restructuring of Ezion and banks' support for it and/or Triyards. Alternatively, if someone were to buy over Ezion's ships from Triyards, it will also throw a lifeline to it.
Thanks for sharing your experience. I have a different approach to investing.
DeleteBefore I dwell into the financial numbers of a company, I take a macro approach to understand the industry the company is in. Renewable enerygy is growing due to technological advances, and it will eventually affect the oil industry. As a matter of fact, oil price crashed due to the technological advance in fracking.
I would stay away from the O&G sector and get vested in renewables or technologies companies. However, our SGX does not have such listing. The STI is still made up of companies in the "traditional" industries. This is why the STI is unable to break new highs.
XM,
DeleteThks for sharing your views.
It might be too broad to generalise that O&G is bad and renewables are good because of technological changes. Within the O&G sector, there are still companies that make money, such as the Engineering, Procurement & Construction companies like Rotary, PEC, Hai Leck, Hiap Seng, etc.
Likewise, not all renewables sectors are making money. If my understanding is correct, some solar panel companies also faced overcapacity issues. You need both top-down and bottom-up approaches to find the correct companies to invest in.
Agree with the comments above. Also, i was close to going into Triyards some time last year. Like you, i thought it has moved far enough away from the O&G segment to be able to survive. Just want to give some credence to that train of thought.
ReplyDeleteIt's probably out of laziness that i did not eventually pull the trigger. Not that i found a red flag.
I know it doesn't make your losses any more bearable, but your sharing here has taught me lessons too. Thank you.
No worries. Got to occasionally pay school fees to learn something new. Just hope that the school fees are small.
Delete