n 6 rigs due for renewal in FY13. Aban confident of contract
renewals and better pricing for 4 rigs. Revenue visibility
expected to improve to 96%/86% for FY13/14 with renewals
n Interest burden to come down as Aban plans repayment of
Rs10 bn of debt in FY13 and looking at refinancing INR debt
of ~Rs18bn leading to savings of Rs1 bn in interest cost
n Improved rig pricing and lower interest cost pressure to
improve cash flows driving increased pace of de-leveraging
of Aban’s stretched balance sheet
n Multiple triggers by way of renewal of rig contract and lower
interest cost to help stock out-performance. Reasonable
FY14E valuation at PER-3.5X, P/B-0.6 & EV/E-6.2X to provide
downside protection- Upgrade to ACCUMULATE- TP-Rs525
Key AGM highlights
We attended Aban Offshore’s AGM to appraise ourselves on the business prospects for
offshore drilling and also Aban’s strategy on rigs deployment.
6 rigs due for renewal in FY13 - Contract renewals and better pricing to
improve revenue visibility to 96%/86% for FY13/14
Aban has 6 of its jack up rigs due for renewal in FY13. Aban’s management remains
confident of bagging contract renewals for 5 out of 6 rigs with its existing clients. And for
the one rig due for renewal in Jan-13 Aban is already looking for new contract. The
company also highlighted that 4 out of the 6 rigs are likely to get ~10% higher day rates.
Deep Drillers 2, 4, 5 deployed in Iran (renewal in Sept-12) and Deep Driller 1 deployed in
India (renewal in Dec-12) are expected to be renewed at higher contract day rates.
However DD7 deployed in Mexico (renewal in Nov-12) would be deployed at current day
rate while DD3 deployed in Malaysia (renewal in Oct-12) would receive lower contract
day rate. With renewal of the 6 rigs, we expect Aban’s revenue visibility (which currently
stands at 79%/48% for FY13/14) to improve substantially to 96%/86%. The contract
renewals not only addresses one of our biggest concern on revenue visibility, but the
better day rates also implies USD21-28 mn higher EBIDTA for Aban’s FY14 numbers.
Debt repayment and refinancing to lower interest cost pressure
With its highly stretched balance sheet and difficult refinance option, Aban’s interest cost
has increased substantially over last 3-4quarter. For eg. Aban’s recently refinanced its
bond bullet payment of USD357 mn through issue of fresh bonds. The 1st Bond issue was
refinanced at coupon of 12% while the 2nd bond redemption was refinanced at coupon of
14.25%. This was significantly higher as compared to its earlier bond coupon of 9.5%. This
has lead to a sharp 35.5% jump in its interest cost in Q1FY13 with its interest coverage
ratio coming down to just 1.7X. However we expect the interest cost pressures to have
peaked out as Aban is looking at refinancing its high cost rupee term loan of Rs18
bn(~USD300mn with interest rate of 13-14%) with ECB (having interest rate of ~7-8%)
there by looking at interest cost saving of 500-600bps. We estimate that the INR debt
refinance would lead to annual interest cost saving of ~Rs0.9-1 bn. Further Aban is also
looking to repay debt of Rs10 bn in FY13 through internal accruals.
Balance de-leveraging to gather pace – Earnings triggers lined up – Upgrade
to ACCUMULATE – Target Rs525
As mentioned earlier the contract renewals not only addresses one of our biggest concern
on revenue visibility, but the better day rates also implies USD21-28 mn higher EBIDTA for
Aban’s FY14 numbers. Further with Rs10 bn of debt repayment and refinance of Rs18 bn
high cost debt, we see lower interest cost pressure help improving cash flows and driving
increase pace of de-leveraging of Aban’s stretched balance sheet. Multiple triggers by way
of gradual renewal of rig contract and lower interest cost to help stock out-performance.
Reasonable FY14 valuation at PER of 3.5X, P/B 0.6 and 6.3X EV/EBIDTA to provide
downside protection to stock. We upgrade our recommendation on the stock from HOLD to
ACCUMULATE. We also revise our price target upwards to Rs525 valuing the stock on
average 6X PER, 6.4X EV/EBIDTA and 0.8X P/B on average of our FY13E/14E numbers.
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