- Aban Offshore
- Rating : Sell
- Target Price : INR575
- Downside : 34%
- CMP : INR869 (as on 30 July 2010)
Lost Pearl hits Q1, risk-reward still unfavorableLoss of high-earnings Aban Pearl hurts revenue and marginsAban reported its Q1FY11 results with revenue of INR8.4bn vs our estimate of 9.1bn. Aban's top-line was hampered by the sinking of its deepwater rig Aban Pearl during the quarter. The loss of this high-earning asset also contributed towards much lower EBITDA margin of 61% vs our and Street expectation of 64%. Aban Pearl being a deepwater rig was yielding EBITDA margins of 70%+. Ignoring the exceptional items, the net profit was INR2.1bn vs our estimate of INR2.5bn, the miss driven largely by lower sales and margins. Aban reported an exceptional loss of ~USD73mn, the net impact of the asset write-off on the books and receipt of USD235mn insurance claim for Aban Pearl. However, we would like to point out that we had already factored in the insurance claim to come in FY11.
Deleveraging uncertainties still existAs we mentioned in our notes, though Aban may meet its planned FY11 debt repayment of ~USD410mn with the help of the USD235mn insurance claim, we estimate a FY12 repayment shortfall of USD323mn and an overall shortfall of USD528mn for FY12-14 (Exhibit 1). As a result, Aban is most likely to opt for debt restructuring, equity dilution or a combination of both. Earnings would be impacted in either case, as we estimate ~15% earnings impact with a 1% interest rate hike and ~25% equity dilution even if the company raises USD200mn.
Risk-reward unfavorable – Maintain SellDespite the stock price and sentiment pick-up in the recent weeks, we believe Aban's weak fundamentals still makes it a very risky pick. Apart from the exposure to negative earnings impact from debt restructuring and equity dilution, we think Aban is still in a tight spot with its expected cash flows very tightly matched against its planned debt repayments. This leaves no room for any even the slightest downside in earnings, in our view. With the business risk so high, we maintain our Sell rating and TP of INR575, recommended investors to switch to more attractive oil service plays such as Shiv-Vani Oil and Gas.
Source : Equity Bulls
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