Aban Offshore-Strong EBITDA but one-offs impact bottom line: Kotak Sec

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Aban Offshore (Aban)
Energy
Strong EBITDA but one-offs impact bottom line. Aban reported 2QFY11 EBITDA
(consolidated) at `5.6 bn (+6.9% qoq and +22.8% yoy) versus our estimate of `5 bn.
Revenues at Rs8.3 bn were marginally above our estimated Rs8.1 bn. However,
reported net income at `752 mn (-152% qoq and +5.2% yoy) was lower versus our
expected `1.25 bn due to (1) unexpected loss from joint venture, (2) provision of `139
mn for diminution in the value of investment and (3) higher-than-expected taxation. .
We maintain our ADD rating with a revised DCF-based target price of `930.




2QFY11 EBITDA higher than our estimate; one-offs impact net income
Aban reported 2QFY11 EBITDA (consolidated) at `5.6 bn (+6.9% qoq and +22.8% yoy) versus our
estimate of `5 bn. EBITDA margin was healthy at 67.2% versus 61.7% in 1QFY11 and 64.4% in
2QFY10; the improvement in margins was led by sharp reduction in other expenditure (-31% qoq
and -22.5% yoy). However, reported net income at `752 mn (-152% qoq and +5.2% yoy) was
lower versus our expected `1.25 bn due to (1) unexpected loss of `302 mn from joint venture, (2)
provision of `139 mn for diminution in the value of investment in Petrojack and (3) higher-thanexpected
taxation.

Valuations are reasonable
We maintain our ADD rating on the stock with a revised DCF-based target price of `930 (`915
previously). We have kept an ADD rating given (1) inexpensive valuations and (2) potential upside
of 10.5% to our target price. We note that the stock valuations look reasonable with the stock
currently trading at 7X FY2011E EBITDA and 6.7X FY2012E EBITDA. On P/E basis, the stock is
trading at 6.4X FY2011E EPS and FY2012E EPS. Key downside risks stem from debt-repayment
capability. We highlight that Aban’s net debt/EBITDA ratio stands at 5.4X and 5X in FY2011E and
FY2012E and EBITDA to interest coverage ratio is at 2.4X and 2.8X in FY2011E and FY2012E.

Deployment of assets lends certainty to earnings
We note that Aban’s entire fleet except Deep Venture is either deployed or has been contracted.
This should allay concerns with respect to earnings uncertainty. We highlight that we assume a
decline in jack-up rates of 12-15% when the contracts are due for renewal. We do not rule out
upside to our earnings estimates from higher-than-expected dayrates led by improved demandsupply
balance.

Earnings revision
We have revised our FY2011-13E EPS to `129 (-14%), `131 (+0.6%) and `141 (+2.7%) to reflect
(1) stronger rupee (-ve impact), (2) 2QFY11 results and (3) other minor changes.

Key details of 2QFY11 results


􀁠 Better-than-expected revenues and EBITDA. Aban reported 2QFY11 revenues at `8.3
bn (+17.8% yoy, -1.7% qoq) slightly above our estimated `8.1 bn. Aban reported
2QFY11 EBITDA of `5.6 bn (+22.8% yoy, +6.9% qoq), higher than our estimate of `5 bn.
EBITDA margin at 67.2% was above our estimated 61.7%.
􀁠 Lower other expenditure. Other expenses were lower at `1.1 bn (-22.5%yoy and -31%
qoq). The management highlighted that there tends to be seasonality in this head of
expenditure depending on the deployment schedule and other maintenance expenditure.
It highlighted that there were no operational efficiencies which resulted in lower-thanexpected
other expenses.
􀁠 Diminution in the valuations of investment for `139 mn. The company provided for
`139 mn in 2QFY11 as diminution in the value of investment in Petrojack which filed for
bankruptcy in March 2010. We note that Aban’s investment in Petrojack (20% stake)
stood at `516 mn as of March 31, 2010. The company has provided for `276 mn as
addition provision in 1HFY11. The value of investment in Petrojack currently stands at
`240 mn which will likely be written off in the subsequent quarters.
􀁠 Loss of `302 mn from joint venture. Aban reported a loss of `302 mn from its joint
venture. The management highlighted that it reflects the cost associated with the early
termination of the contract and idling of the rig. The management also guided that the
costs will be significantly lower in the subsequent quarters even if the rig remains idle.