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Concerns galore
We initiate coverage on Aban Offshore (Aban) with a
Sell rating factoring in major concerns like its focus on
geo-politically sensitive region like Iran and its highly
leveraged balance sheet. We believe lower-than-market
rates for the assets that are likely to come for
re-negotiations over the next two years would keep
revenues and profitability under pressure. We estimate
3.5% CAGR decline in EBITDA over FY11-13E to
Rs19.6bn, while its debt is likely to reduce by 16.2% to
Rs107bn over the same period. We have valued the
stock at 6.6x FY12E EBIDTA, a 10% discount to global
peers, to arrive at our target price of Rs560.
New contract rates at lower than market rates: We
expect Aban would be able to re-price its assets only at
lower-than-market rates due to the high supply and
low utilisation levels of rigs worldwide. We estimate
Aban’s older rigs to be renewed at a 20-30% discount,
while the newer rigs to be deployed at a 10% discount
to market day rates. We believe this would keep
revenues and profitability under pressure and drive
valuations lower.
Balance sheet to remain highly leveraged: Despite
high cash generation and pre-payment of debt from
the proceeds of Aban Pearl and Deep Venture, we
expect the debt-to-equity ratio remain at a high of 3.4x
by FY13E. Aban is scheduled to make total debt
repayments of US$650mn (including bullet payments)
in FY12 and about US$365mn in FY13. We estimate the
company would require refinancing about US$430m of
debt in FY12 and US$230mn in FY13 as cash flows will
fall short of meeting its debt liabilities.
High concentration in Iran: The high concentration on
Iran to continue to be a major cause of concern as 33%
of its fleet is deployed in the region. We believe that
this can be a huge business risk, if global situation
worsens and Iran comes under severe international
financial embargo.
Valuations not comforting at current levels: Aban is
currently trading at 7.1x FY12E and 6.8x FY13E
EV/EBITDA and appears expensive. We believe the
current discount of 6% on EV/EBITDA to global offshore
drilling companies doesn’t factor in the risks of high
debt, concentration in Iran and lower day rates for its
assets. We value the stock at 6.5x FY13E EBITDA, a 10%
discount to international peers, to arrive at a fair value
of Rs560/share, offering 17% downside from current levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Concerns galore
We initiate coverage on Aban Offshore (Aban) with a
Sell rating factoring in major concerns like its focus on
geo-politically sensitive region like Iran and its highly
leveraged balance sheet. We believe lower-than-market
rates for the assets that are likely to come for
re-negotiations over the next two years would keep
revenues and profitability under pressure. We estimate
3.5% CAGR decline in EBITDA over FY11-13E to
Rs19.6bn, while its debt is likely to reduce by 16.2% to
Rs107bn over the same period. We have valued the
stock at 6.6x FY12E EBIDTA, a 10% discount to global
peers, to arrive at our target price of Rs560.
New contract rates at lower than market rates: We
expect Aban would be able to re-price its assets only at
lower-than-market rates due to the high supply and
low utilisation levels of rigs worldwide. We estimate
Aban’s older rigs to be renewed at a 20-30% discount,
while the newer rigs to be deployed at a 10% discount
to market day rates. We believe this would keep
revenues and profitability under pressure and drive
valuations lower.
Balance sheet to remain highly leveraged: Despite
high cash generation and pre-payment of debt from
the proceeds of Aban Pearl and Deep Venture, we
expect the debt-to-equity ratio remain at a high of 3.4x
by FY13E. Aban is scheduled to make total debt
repayments of US$650mn (including bullet payments)
in FY12 and about US$365mn in FY13. We estimate the
company would require refinancing about US$430m of
debt in FY12 and US$230mn in FY13 as cash flows will
fall short of meeting its debt liabilities.
High concentration in Iran: The high concentration on
Iran to continue to be a major cause of concern as 33%
of its fleet is deployed in the region. We believe that
this can be a huge business risk, if global situation
worsens and Iran comes under severe international
financial embargo.
Valuations not comforting at current levels: Aban is
currently trading at 7.1x FY12E and 6.8x FY13E
EV/EBITDA and appears expensive. We believe the
current discount of 6% on EV/EBITDA to global offshore
drilling companies doesn’t factor in the risks of high
debt, concentration in Iran and lower day rates for its
assets. We value the stock at 6.5x FY13E EBITDA, a 10%
discount to international peers, to arrive at a fair value
of Rs560/share, offering 17% downside from current levels.
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