| Multi Bagger: Aban Offshore Ltd Recommended Price Rs 4000.00 | |||||
| Report Dated: May 30, 2008 | |||||
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Aban well poised to leverage on industry dynamics:
Aban Offshore Ltd (Aban) has been a key player in the Indian offshore rig market. With the acquisition of Sinvest, it has entered into the big league of international players and will now have a global presence. Along with Sinvest, it will have 22 rigs by the end of FY09. Recently, Aban has been able to take substantial hikes in day rates and six more assets are due for renewal in the next 10 months. Also, addition of assets to the fleet will fuel volume growth.
| Period to | FY07 | FY08E | FY09E | FY10E |
| (Rs mn) | (12) | (12) | (12) | (12) |
| Revenues | 7,187 | 25,788 | 49,827 | 57,205 |
| yoy growth (%) | 46.6 | 258.8 | 93.2 | 14.8 |
| Operating profit | 3,474 | 16,183 | 35,209 | 39,428 |
| OPM (%) | 48.3 | 62.8 | 70.7 | 68.9 |
| PAT | -344 | 4,065 | 19,123 | 22,386 |
| yoy growth (%) | - | - | 370.4 | 17.1 |
| EPS (Rs) | -9.3 | 105.9 | 498 | 583 |
| P/E (x) | - | 38.2 | 8.1 | 6.9 |
| P/BV (x) | 28.1 | 17.9 | 5.9 | 3.3 |
| EV/EBITDA (x) | 70.4 | 15.9 | 6.7 | 5.5 |
| ROE (%) | - | 46.8 | 73.1 | 48.2 |
| ROCE (%) | 1.4 | 7.1 | 20.2 | 21.5 |
(Source: Company, India Infoline Research)
Investment rationale:
Acquisition of Sinvest propels Aban into the big league:
Aban began expanding inorganically in FY01 through acquisition of Hi-Tech Drilling Services (India) Ltd. With shipyards flush with order book positions, the delivery time for new rigs has increased to more than three years. Hence, Aban has continued with its inorganic growth strategy and acquired Sinvest for US$1.35bn. Sinvest has five rigs operational and five at various stages of construction. With its erstwhile fleet, Aban’s primary customer was ONGC. Acquisition of Sivest puts Aban into the global arena as a leading player.
Listing of Singapore subsidiary will unlock value:
Aban has 13 of its assets (including Sinvest) in its Singapore subsidiary, Aban Singapore (ASL). Aban plans to list ASL by divesting some stake. The process would help the company raise some funds and reduce debt on books raised for acquisition of Sinvest. The listing would unlock value for its minority shareholders.
Re-pricing of existing assets and volume increase through new assets to drive revenue growth:
Contract renewals for six of Aban’s assets (including Sinvest) are due over the next ten months. With the current tightness in the rig market, we expect the re-pricing of these contracts to happen at significantly higher rates compared to their existing rates. Volumes too are expected to increase as six vessels get added to the fleet over the next couple of years. This would translate into a CAGR of almost 100% for Aban’s revenues during FY07-10E.
EBIDTA margins to expand as new vessels are added to the fleet:
With addition of assets from Sinvest acquisition, the average age of Aban’s fleet would decline substantially. This would translate into lower repairs and maintenance expenditure. Significant jump in day rates would also help margin expansion. We expect OPM for Aban to increase from 48.3% in FY07 to 68.9% in FY10E.
Strong operating cash flows will improve leverage position going ahead:
With robust growth in earnings on back of strong revenue growth and expansion in operating margins, the cash flow from operations is expected to be strong. This would help improve the debt – equity ratio, which is currently at 14.2x to about 2.3x by FY10E.
Concerns:
Steep fall in crude oil prices:
Any steep fall in crude oil prices will put pressure on NPV of many offshore projects. However, we don’t foresee any such event as the demand supply scenario for crude oil is not expected to change dramatically in the coming years.
Timely delivery of rigs:
Based on tight supply for EPC contractors, we forecast that there could be delays in delivery of rigs from shipyards. Recent trend also support our presumption. However, timely delivery of rigs could put pressure on day rates. Aban would be cushioned to some extent as many of its assets are on long term charters.
ONGC capex delay:
With crude oil prices going through the roof, the under recoveries on sale of petrol, diesel, kerosene and LPG is burgeoning and is estimated to be Rs 2 trillion for FY09. ONGC’s has to share almost 30% of these under recoveries. This would lead to a cash crunch for ONGC and thus jeopardizing their future capex plans. We believe this could slowdown order flows to rig operators like Aban. However, Aban can float these rigs in the international market and alleviate the concern.
Global peer comparison:
OPM (%) P/E EV/EBIDTA CY08E CY09E CY08E CY09E CY08E CY09E Diamond Offshore 64 65.3 13.6 11.3 7.2 6 Noble Corp 63 64.3 11.2 9.5 5.9 5.1 Ensco International 65.2 63.8 9.5 8.9 5.4 5.1 Pride International 46.7 47.3 13.1 11.4 5.7 5 Hercules Offshore 46.3 49.8 18.6 12.7 6.8 4.7 Rowan Companies 39.7 40.6 10.1 8.8 5.3 4.6 Transocean 56.8 58.2 11.4 9.7 8.1 7.1 Nabros Industries 34.2 35.5 13.2 11.5 7 6 Average 52 53.1 12.6 10.5 6.4 5.4 Aban Offshore # 70.7 68.9 7.9 6.8 6.6 5.4
Attractively valued compared to international peers:
Historically, Aban has clocked the highest operating margins in the industry at a global scale. Further, the growth rate expected for Aban over the next couple of years is higher than most of its peers. Our estimates are based on current day rates existing in the market. With strained demand supply scenario for rigs, upsides to our estimates cannot be ruled out. Also, listing of the Singapore subsidiary could unlock value for the company. At CMP of Rs 4,000 the stock is trading at a P/E multiple of around 8.1x and 6.9x FY09E and FY10E respectively compared to international average of 12.6x and 10.5x on CY08E and CY09E. We believe the stock should trade at 9x FY10 estimated earnings of Rs583. We recommend a BUY with a target price of Rs 5,247, an upside of 31.2%.
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