Stock Idea - Aban Offshore

Recommendation: Buy

CMP = Rs 5,050

Price target: Rs 5,420

Result highlights:

• For Q3FY2008, Aban Offshore Ltd (AOL) has reported a growth of 34% quarter on quarter (qoq) and of 2.3% year on year (yoy) in its stand-alone revenues to Rs 169.1 crore. On an annual basis, the growth is largely driven by the higher day rates for its floating production units Tahara and Aban VI. Moreover, the incremental revenues from Aban II have also aided the overall growth in revenues.
• The operating profit margin has declined by 80 basis points yoy to 54% largely due to the jump in the rental charges as a percentage of the sales (7.4% of sales as compared with 2.2% in Q3FY2007 and 6.1% in Q2FY2008). This was partially mitigated by the savings in the consumables and insurance cost. The operating profit grew by 8.7% qoq and 32.2% yoy to Rs 84 crore.
• The other income jumped by 342.8% to Rs 24.8 crore, enabling the company to report a 129.8% increase yoy in its stand-alone earnings to Rs 47.8 crore. Sequentially, the earnings grew marginally by 1.1% largely due to a higher other income and better margins. 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 extended the existing contract for Aban VI for three years (with an option to further extend for three more years) with Oriental Oil, Dubai. The contract is estimated to generate $95 million (amounting to a day rate of $88,500, which is much higher than $39,000 earlier) over the firm contract period of three years. Through its Singapore subsidiary, the company has entered into a contract with Chevron Offshore (Thailand) to deploy jack-up drilling rig, Deep Driller 2, for an estimated duration between five and seven months for drilling operations offshore Thailand.
• This contract will commence this month at a day rate of around $186,650. Apart from this, AOL (through a subsidiary company, Aban Pearl Pte) completed the purchase of the semi-submersible Rig "Bulford Dolphin" (being renamed "Aban Pearl") on November 21, 2007. All the three vessels would add to the company’s overall growth in the fourth quarter ended March 2007.
• At the current market price the stock trades at 12.9x FY2009 and 10x FY2010 estimated earnings. In addition to the attractive valuations and favourable macro environment, the impending listing of its Singapore subsidiary continues to be an important trigger for the stock going ahead.
• I maintain the Buy call on the stock with a price target of Rs 5,420.