Stock Idea - Aban Offshore

Recommendation: Buy

CMP = Rs 4,010 (as of Friday)

Price target: Rs 4,400

Result highlights:

·         For Q2FY2008, Aban Offshore has reported a growth of 28.3% quarter on quarter (qoq) and of 29.6% year on year (yoy) in its stand-alone revenues to Rs 165.3 crore. The growth is higher than expectations even after factoring in the revised day rates for its floating production unit Tahara (day rates of $87,500 effective from July 2007, up from around $27,000 earlier) and incremental revenues from Aban II.

·         The operating profit margin has declined by 410 basis points yoy to 50.8% largely due to the jump in the staff cost as a percentage of the sales (10.4% of sales as compared with 6.9% in Q2FY2007 and 9.2% in Q1FY2008). The operating profit grew by 23.4% qoq and 18.7% yoy to Rs 82.4 crore.

·         The other income jumped by 241% to Rs 22 crore, enabling the company to report a 122.6% increase yoy in its stand-alone earnings to Rs 47.2 crore. Sequentially, the earnings grew by 66.5% due to a 42.9% jump in the other income component.

·         It should be noted that the stand-alone results do not provide the complete picture as the valuations are based on the consolidated earnings estimate of FY2010. 

·         In terms of key events, the company has announced a contract for three of its jack-up rigs (Aban III, Aban IV and Aban V) with Oil & Natural Gas Corporation for a period of three years. At the renewed day rate of US$156,600 the total value of the contract works out to around Rs 2,000 crore. The three rigs are being redeployed at an effective day rate of US$156,600, which is ahead of our earlier assumption of US$145,000.

·         In addition to this, the company has recently announced contracts for two assets: Deep Driller 4 (a newly built jack-up offshore rig under Sinvest) and Aban VI (a 250-feet jack-up rig built in 1975). The contract for Deep Driller 4 would generate $80 million over the one-year period, translating into a day rate of $220,000, higher than $201,000 reported for DD5 in the last quarter.

·         On the other hand, the existing contract for Aban VI is extended for three years (with an option to further extend for three more years) with Oriental Oil, Dubai and is estimated to generate $95 million (amounting to a day rate of $88,500) over the firm contract period of three years. The company's ability to negotiate long-term contracts at higher than expected day rates is quite encouraging and has led to significant re-rating of the stock over the last quarter.

·         At the current market price the stock trades at 10.2x FY2009 and 7.9x FY2010 estimated earnings. The impending listing of its Singapore subsidiary is an important trigger for the stock going ahead.

·         I maintain Buy call on the stock with a revised price target of Rs 4,400.