Aban Offshore -BuyPrice target: Rs 4,829

Aban Offshore
Cluster: Emerging StarRecommendation: BuyPrice target: Rs4,829 Current market price: Rs2,610
All’s well
Key points
We highlight that Aban Offshore would not be affected in any way by the recent decision of the shipping ministry to bar operations of all categories of vessels that are more than 25 years old during periods of foul weather. We clarify that this ban does not pertain to rigs.
Aban Offshore, in its board meeting to be held on July 21, 2008, would consider a proposal to raise capital through the issue of any of the following: Redeemable non-convertible preference shares, foreign currency convertible bonds (FCCBs), global depository receipts (GDRs), American depository receipts (ADRs) etc. We view this development as a major positive since it would bring down the high debt levels of the company (the debt-equity ratio of the company stands at 12:1 currently); the placement too is likely to be done at a higher price, which would be a positive trigger for the stock.
We expect the company to receive three new jack-up rigs in the next couple of quarters, which would not only drive its earnings and cash flow in future but also lead to a reduction in its debt-equity ratio.
We also highlight the potential of the company to generate strong cash flow going forward, on account of the re-pricing of its assets at higher rates and the deployment of its new rigs. We expect the company to generate an average cash flow of about Rs2,100 crore per annum over the next four years. The net present value of the cash flow generation from the operating activities over FY2009-12 is estimated at Rs6,560 crore. This itself works out to Rs1,684.8 per share for Aban Offshore, indicating the attractiveness of the stock at the current market price.
At the current levels, the stock is trading at 5.4x FY2010E earnings and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 4.7x. We feel the valuations are extremely attractive and maintain our Buy recommendation on the stock with a price target of Rs4,829.