Aban Offshore-Creditable margin performance for 2Q FY11 : Daiwa

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Aban Offshore (ABAN IN) Rating:4
Creditable margin performance for 2Q FY11 but stock looks over-valued to us


What has changed?
• Aban Offshore announced a net profit (before preference dividends) of Rs752m
for 2Q FY11. The EBITDA margin was higher than our forecast, whereas
exceptional items dragged the net profit below our forecast of Rs892m.


Impact
• Aban Offshore’s operational results for 2Q FY11 were better than we expected.
EBITDA was Rs5.56bn, higher than our forecast of Rs5.10bn. The EBITDA
margin for 2Q FY11 stood at 67%. Lower-than-expected ‘other expenses’ for
the quarter resulted in a better-than-expected margin performance. We have
revised down our forecasts for other operating expenses by 17%, 14% and 9%,
respectively, for FY11, FY12 and FY13.
• However, the results continued to be affected by negative surprises. Aban
Offshore booked a write-down of Rs139.4m for the decline in the value of an
equity investment made in a Norway company. We understand that it may make
a further residual write-down for 3Q FY11.

• The share in the earnings of joint ventures and associates was a loss of Rs302m
for 2Q FY11, as the rig Deep-Venture, held in a 51%-owned joint venture, is
idle currently. We expect the joint venture to record a loss until the rig is
employed on a contract. Accordingly, we have lowered our forecasts.
• We have revised up our EPS forecasts by 4.1%, 13.1% and 6.6%, respectively,
for FY11, FY12 and FY13, to reflect mainly the downward revisions to our
forecasts for other operating expenses.

Valuation
• Although we have revised up our earnings forecasts, we continue to believe that
Aban Offshore is over-valued, trading currently at EV/EBITDA multiples of
6.8x and 6.6x on our respective FY11 and FY12 EBITDA forecasts. We
maintain our six-month target price of Rs774, based on a target EV/EBITDA
multiple of 6.6x on our normalised EBITDA forecast.

Catalysts and action
• We maintain our 4 (Underperform) rating on Aban Offshore. Oversupply in the
jack-up rig market remains the key concern for us. According to the latest rigzone
data, 82 jack-ups are in ready-stacked mode, another 74 are in coldstacked
mode and 42 are under construction with delivery likely between 2011-
13. With a moderate rise in rig demand and continuing oversupply, we believe
daily rig rates are likely to be under pressure and should be reflected in new
contracts for Aban Offshore. Lower-than-expected rig rates on new contracts
could be a negative share-price catalyst.