Bull's Eye,

Aban offshore
RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: RS 2,695.15

GOLDMAN Sachs reiterates ‘buy’ rating on Aban Offshore with a P/E-based 12-month target price of Rs 4,375, implying potential upside of 64%. Discounted cash flow value is Rs 4,500/share. Aban’s FY08 pre-exceptional consolidated net profit stood at Rs 310 crore, beating the estimate of Rs 250 crore by 22%. Aban’s reported FY08 profit of Rs 120 crore had a one-time translation loss of Rs 180 crore due to adverse movement of NOK-USD exchange rates since March ’07. Strong operating results were offset by higherthan-expected interest cost.

Better-than-expected operating results and persistent market fears of large derivatives loss proving to be untrue will lead to re-rating of the stock. Goldman expects Aban to announce contracts for five assets - jack-up rigs Deep Driller III, VI, VII and VIII and semi-submersible rig Aban Pearl - over the next 1-6 months. Goldman estimates the jack-up day rates to be $180-185K for short-term contracts and at a 10% discount for long-term contracts. For Aban Pearl, Goldman has assumed a day rate of $275K. So far, Aban’s last nine contracts have been at rates higher than estimates.

Aban’s stock is trading at 5.8x FY10E EPS, which implies a discount of 23% to the global average for offshore drilling companies. Aban still has the best earnings growth profile in the medium term in its peer group, with EPS CAGR of 162% between FY08 and FY10E, even after cutting FY09E EPS by 3.5% to reflect delay in deployment of Frontier Ice at higher day rates.
Source : The Economic times dt. 28 7 2008