India’s largest private shipbuilder, ABG Shipyard Ltd, is well poised to benefit on the recovery in sea-borne trade, increasing freight rates and strong capital expenditure lined up in the offshore segment, which will provide a fillip to fresh order inflows.
Further, we expect a cash inflow of Rs1,000 crore by FY11 through a stake sale in Great Offshore Ltd, the payment from Essar Shipping Ports and Logistics Ltd and the release of Rs140 crore from the government in the form of subsidy, which will ease leverage. We value ABG Shipyard at eight times price-earnings on its estimated FY12 earnings (ex-subsidy) in line with global peers. We are also valuing ABG Shipyard’s 15% stake in Great Offshore on the current market price, giving a 20% holding company discount which works out to Rs36 per share. Based on this, our target price works out to be Rs354 per share. We recommend an accumulate on ABG Shipyard.
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There could be another 25% upside to our fair value in case of a faster subsidy disbursement. ABG Shipyard’s total order book stands at Rs12,660 crore, of which the unexecuted portion is around Rs8,700 crore and is executable by FY14. This translates to 5.6 times its estimated FY10 revenues, providing strong revenue visibility. Additionally, the company has ramped up its capacities at Surat and has commissioned a new capacity at Dahej, which will ensure the timely execution of vessels.
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So far, ABG Shipyard has booked Rs489 crore as subsidy in FY10 (year-to-date).
During the current economic crisis, the company has managed to avoid any cancellations or price negotiations of its order book.
We believe that ABG Shipyard’s top clients are unlikely to default on vessel payments as most of them are well established firms in their respective businesses with a financial backbone to withstand the current turmoil.
The company has undertaken substantial capacity expansion over the past few years and, currently, has a combined capacity of nearly 1,45,000 deadweight tonnage (dwt). Its Surat yard is spread over 35 acres of land, with 250 metres water frontage and has a capacity of 22,500 dwt to build vessels up to 150 metres in length. ABG Shipyard’s current infrastructure allows it to simultaneously construct 35-40 vessels of smaller sizes on a modular basis, using 18 ship building berths and four outfitting jetties. The Dahej yard is much larger, spread over 165 acres and 1,000 metres, with a capacity of 1,20,000 dwt, to build vessels up to 250 metres in length. The yard is equipped with ship lifting capacity of 33,000 tonnes and can build four rigs simultaneously along with 12 bulk carriers and 10 offshore supply vessels (OSVs) on a modular basis.
ABG Shipyard has a strong delivery record. It has delivered 115 vessels of varying complexity over its operational history. The company delivered six vessels in the first half of FY10, matching the number of vessels delivered in FY08 and FY09 each, and has a target of delivering 15 vessels for FY10. Further, the company has a scheduled vessel delivery of 87 vessels between FY11 and FY14.
ABG Shipyard has a diverse order book mix, with a substantial exposure to offshore segments (40% of its order book). The sharp recovery in crude oil prices have encouraged oil companies to carry out exploration and production, providing a fillip to deepwater rig contractors. There is also a constraint on the supply side for rigs and offshore support vessels due to ageing fleets and a demand for younger vessels with higher specifications.
Around 48% of the anchor handling tug supply vessels (AHTSV) and 65% of the OSV fleet is more than 25 years old and is due for immediate replacement. This also reduces the risk of order cancellation for ABG Shipyard’s offshore vessels.
The search for new hydrocarbon reserves has pushed the boundaries of technology to facilitate new discoveries in deeper water and harsher environments. As per Ocean Shipping Consultants, in the base case, offshore oil production is likely to increase from an estimated 25 million barrels per day (mbpd) in 2007 to 30 mbpd by 2010 and to 42 mbpd by 2020. This equates to a rise in output of about 62%. Consequently, the AHTSV fleet is likely to increase from its current 1,448 vessels to about 1,850 vessels by 2015 and potentially to over 2,000 vessels by 2020.
In case of the platform supply vessel fleet, it is expected to increase from 457 vessels to 760 vessels by 2015, and to 840 vessels by 2020.
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