Aban Offshore - Re-pricing is key

Aban Singapore's jack-up fleet is up for contract re-pricing between now and 1H09. We believe this is the key to stock price performance. That said, Aban is heading into peak earnings, which should maintain earnings momentum. Revised TP, Rs2,740. 

Re-pricing holds the key 

We believe most deepwater assets are booked into 2010 with charterers willing to book 2011 newbuild deliveries on long-term contracts. The order backlog with deepwater operators clearly shows the strength in this market. That said, the jack-up market is scheduled to see deliveries of 59 newbuilds (16.3% of global fleet) between 2H08 and end-2009 (not adjusting for delays and contracted rigs). Consequently, jack-up rates are likely to see some pressure in 2009, in our view. Aban Singapore's jack-up fleet is up for contract re-pricing between now and 1H09. This holds the key to stock performance, in our view. We have lowered our day rate assumption on Aban Singapore's jack-up fleet by 12.5% and reduced utilisation from 95% to 90%, which Aban should be able to achieve, in our view. 

Heading into peak earnings 

With all assets operational in FY10, we expect Aban's earnings to more than double, which should maintain the earnings momentum. On peak earnings, we expect Aban to generate net operating cash flows of US$530m, which is likely to be used to pay down the consolidated debt of US$3bn. With a leveraged balance sheet, Aban will find it hard to grow assets without equity dilution. Further, the jack-up day rates of US$175,000 that we expect in FY09 are unlikely to increase. 

Valued at 3.9x FY10 P/B 

While we have lowered our FY09-10F earnings by 55% and 15% respectively, we think that is factored into the stock price, which has corrected by 55% from its peak last January. The reasons for our earnings cuts are: 1) reduced utilisation on Aban S'pore assets, 2) reduction in Aban S'pore jack-up day rates, 3) higher opex estimates. Based on three-year forward average RoE of 62.7% and CoE of 16.5%, we value Aban Offshore at 3.9x FY10F P/B (vs 3.6x FY10F P/B earlier), which we discount back to FY09F. This results in our revised target price of Rs2,740 (down from Rs3,980). At our target price, Aban would trade at 6.3x PER and 5.4x EV/EBITDA on three-year forward earnings. Our global offshore rig universe trades at 6.2x PER and 4.8x EV/EBITDA on three-year forward earnings.