South East Asia Marine Engineering & Construction
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs300
Current market price: Rs223
High charter rates improves earnings
Result highlights
- South East Asia Marine Engineering & Construction (SEAMEC) has reported a growth of 26.5% in its revenues to Rs46.7 crore in Q2CY2007. The growth in revenues was largely driven by an increase in day rates for two of its vessels (Seamec-II and Seamec-III) that were renegotiated in the second half of CY2006.
- The operating margin, however, declined by 290 basis points to 49.4% largely due to a jump of 96% in the staff cost to Rs14.4 crore. The staff cost as a percentage of net sales increased by 1,090 basis points to 30.7% in Q2CY2007, as compared with 19.8% in Q2CY2006. Consequently, the operating profit increased by around 20% to Rs23.1 crore as compared with Rs19.3 crore in Q2CY2006.
- The increase in the interest outgo and higher depreciation charges resulted in a relatively lower growth of 15% in its earnings to Rs19.6 crore.
- On a half-yearly basis, the revenues grew at a healthy rate of 60.9% to Rs102.8 crore whereas the earnings rose at a relatively lower rate of 36.5% to Rs44 crore due to the steep increase in the staff cost (up by 175.8% to Rs34.5 crore).
- In terms of operational highlights, one of the company's vessels Seamec-I went for the periodic maintenance from mid June 2007 and is expected to get operational by the third week of July 2007. The dry docking expenses for the same will be accounted in Q3CY2007. Another vessel Seamec-II is scheduled to go for the statutory periodic maintenance by the end of Q3CY2007. Further, the delivery of its fourth vessel Seamec Princess has been delayed to the mid of the current quarter.
- To factor in the change in the exchange rate assumption (Rs41 in CY2007 and CY2008 as compared with Rs44 earlier), delay in the delivery of Seamec Princess and higher than expected dry-docking period for Seamec-I, we have revised downwards CY2007 and CY2008 earnings estimates by 24.7% and 2.4% respectively.
- At the current market price the stock trades at 12.7x CY2007 and 6.5x CY2008 earnings. We maintain our Buy rating on the stock with a price target of Rs300.
ICICI Bank
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,173
Current market price: Rs872
FIPB hurdle cleared, positive for valuations
Key points
- ICICI Bank has obtained the Foreign Investment Promotion Board (FIPB) approval (subject to RBI clearance) to sell upto 24% stake in its financial services company to foreign investors. This proposal had earlier been rejected by FIPB on the grounds that it did not comply with the 26% foreign direct investment (FDI) cap in insurance ventures and also that the promoter of an insurance venture cannot be the subsidiary of the same company, ICICI Financial Services (IFS) in this case.
- The above view of FIPB was in contradiction to the view expressed by the finance ministry's insurance division and the Insurance Regulatory and Development Authority that the FDI in ICICI Bank's proposed holding company would not violate the norms. The change in the stance of FIPB is a welcome move for ICICI Bank and other banks like state Bank of India who are looking to adopt the holding company route to raise the capital for their insurance business.
- Our back of the envelope calculation suggests that with the formation of the holding company and its future listing, the overall valuations of the stock can further improve by Rs78 per share as the core banking business can improve by 4% or Rs30 per share, and if the market valuations for its subsidiaries are taken as a benchmark then there is a further upside to our valuations of Rs48 per share. The details on the valuation upside are explained later.
- At the current market price of Rs872, the stock is quoting at 19.1x its FY2009E earnings per share, 9.3x its pre-provisioning profits and 1.9x book value (BV). We maintain our Buy recommendation on the stock with a price target of Rs1,173.
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs3,540
Current market price: Rs2,760
Price target revised to Rs3,540
Key points
- AOL's consolidated financial performance in FY2007 is below our expectations as the line-by-line consolidation of Sinvest was done only with effect from January 9, 2007 (after it become the wholly owned subsidiary of Aban Singapore Pte [ASPL]). In terms of its consolidated balance sheet, the company had total debt of Rs10,852 crore (debt-equity ratio of 20.4). The gross block of Rs8,099 crore included a goodwill of Rs4,800 crore which would not be amortised, and only the impairment cost (if any) would be charged to the profit & loss account.
- To support its decision to acquire Sinvest, the company believes that the step was taken keeping in view the robust industry outlook (i.e. the record day rates and consequently the compelling payback). Moreover, the strong visibility in cash flow more than negate the financial risk in terms of higher debt-equity of over 20 times. The outlook for the day rates continues to be robust with the support from favourable supply-demand scenario and the increasing pricing power of operators due to the consolidation among leading global players. Further, AOL is taking steps to enter into long-term contracts for its older assets that are more venerable to a possible softening of day rates going forward.
- The proposed listing of its Singapore-subsidiary ASPL (which holds 100% stake of Sinvest and controls three other assets) at the indicated equity value of $2.5-3 billion (much higher than market expectations) is an important re-rating trigger for the stock. Another likely positive development is the unexpected gain of $90 million due to the acquisition of Petrojack where AOL holds indirect stake of 18%.
- The earning estimates have been revised downwards by 25% for FY2008 (primarily due to delay in the schedule for some assets and change in the exchange rate assumption) and upgraded by 8.6% for FY2009 estimates. At the current market price the stock trades at 25x FY2008 and 7.4x FY2009 earning estimates. We maintain the Buy call on the stock with a revised price target of Rs3,540 (8.5x FY2010 estimates discounted backward by one year).
SECTOR UPDATE
Cement
Dispatches up 14.5% yoy in July
In July, industry dispatches grew by 9.5% year on year (yoy) whereas the dispatches for the Sharekhan universe rose by a robust 14.5% yoy to 7.63 million metric tonne (MMT) underlining the buoyancy in the appetite for cement consumption. As mentioned in our earlier update, among the majors, Ambuja Cements witnessed the highest growth of 19% due to a lower base last year. Similarly ACC and AV Birla Group recorded a strong growth of 15% yoy and 13% yoy respectively.