>ABAN OFFSHORE (CITI)

■ Reiterate Buy; attractively poised as de-leveraging gathers pace — We reiterate
Buy on Aban with a new target of Rs1650, imputing an EV/EBITDA of 7x FY11E, in line with global comps (lower P/E though, due to high D/E). While we do not argue for a higher target multiple, the stock appears attractively poised and could deliver further outperformance as de-leveraging gathers pace – net debt now constitutes 65% of our EV vs. 71% earlier; this further reduces to 54% in FY12E after pay down of debt through internal accruals only with no further capital required, which could drive a further ~30% increase in equity value with no change in EV.

■ Adjusting TP for capital raising — We increase our TP to Rs1650 from Rs1550 as we roll forward our DCF to Sep-10 from Mar-10 earlier. Our FY11-12E EPS is, however, adjusted downwards by 14-16%, primarily due to the 15% dilution following the US$150m that was raised by the company in Nov-09 (our EBITDA and net income numbers are adjusted by a modest 1-2% in comparison).

Reiterate Buy as De-leveraging Commences; Raising TP to Rs1650

■ 3Q preview – better utilisations to drive strong growth — Aban’s weak performance in 2Q was driven by the full impact of the 7 idle rigs. Subsequently, in 3Q, 4 of these rigs having commenced new contracts while drillship Aban Abraham has finally overcome its teething problems to start contributing to revenues. The result is a sharp increase in 3QE net income to Rs1.9bn from Rs714m in 2Q. 4Q should be even stronger sequentially driven by expected commencement of revenues from Aban Pearl and lower interest costs (with the capital raised in 3Q having been used to redeem bonds worth Rs8bn).

■ Contracts for remaining idle rigs could be next trigger — 4 of Aban’s jack-ups are still idle viz. DD1, DD6, Aban VII, and DD8 (contract recently ended). The company is currently marketing all rigs and any newsflow on contract fixtures could be a +ve trigger, as it would remove any remaining doubts on sustainability of cash flows till debt is paid down to reasonable levels. We currently factor in day rates of US$110-120K for 3 of the idle rigs and assume the 4th (Aban VII) remains idle). On our ests., Aban’s D/E reduces from 11.3x in FY09E to 2.5x by FY12

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