Buy Aban Offshore; target of Rs 580: Emkay

“Aban’s Consolidated Q1FY12 EBITDA of Rs4.6bn (-12% yoy) came in below estimates of Rs4.8bn on account of lower than expected operating days for the Aban IV. This led to lower than expected revenues for the quarter at Rs7.3 (vs est of Rs7.7 bn) which declined 13% yoy & 18.6% qoq. The 18.6% sequential revenue declined was on account of idle status of Aban III & V which are undergoing periodic dry-dock. Aban’s EBIDTA margins though up 100 bps yoy to 62.7%, declined 331 bps qoq due to 55% jump in insurance charges . Insurance charges jumped due to higher renewal premium charges for rigs. With 60% decline in other income Aban’s 1QFY11 APAT before minority (RPAT included forex losses of Rs55mn) at Rs0.94 bn decline 15% yoy (-52% yoy), lower than our estimates of Rs.98 bn. Q1FY11 APAT included income from Deep Venture (Aban’s 50% JV which got terminated in Q3FY11) and hence Aban APAT after minority declined 54.2% yoy.”

“During the quarter Aban Abraham commenced its 5 years operation in Brazil. Further With Aban III & V ready to commence operation from 3QFY12, Aban now is left with only 2 rigs idle. Such healthy deployment status arms Aban with contracted revenue backlog of ~USD2 bn and revenue visibility of 95% for FY12E. We estimate Aban to generate CFO of ~ USD400mn over FY11-13E, leading to accelerated deleveraging of its stretched balance sheet (FY11 D: E of 5.7X). We see Aban D: E reducing sharply from current levels of to 3.4 for FY13.”

“Stock decline of ~ 20% over last 3 months have made current valuations at 4.9X FY12 PER and 0.7X FY12 P/BV attractive and could provide downside support to stock. We upgrade our rating from ACCUMULATE to BUY. However we are downgrading FY12E earnings by 5% (EPS of Rs90.3) and lower our target price to Rs580 (as compared to Rs645 earlier) due to lowering of our EV/EBIDTA multiple for Aban from 6.5X to 6X earlier led by decline in valuation of its international peers,” says Emkay Global Financial Services research report. 

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