ABG Shipyard –Accumulate- Angel Securities

ABG Shipyard (ABG), the largest private shipbuilder in India, is well poised to benefit on the recovery in sea-borne trade, increasing freight rates and strong capex lined up in the offshore segment, which will provide fillip to fresh order inflows.

ABG’s total order book stands at Rs12,660 crore, of which the unexecuted order book is around Rs8,700 crore and is executable by FY2014E. This translates to 5.6x FY2010E revenues, thus providing strong revenue visibility. Further, we expect a cash inflow of Rs1,000 crore by FY2011 through a stake sale in great offshore, the payment from Essar (financial closure has been done with IDBI by Essar) and the release of Rs140 crore from the government in the form of the subsidy which will ease leverage.

At the CMP, ABG is trading at 7.8x FY2012E earnings, EV/EBIDTA of 8.1x and 1.4x P/BV, according to its FY2012 estimates. We value ABG Shipyard at 8x P/E on FY2012E earnings (ex-subsidy), in line with global peers. We are also valuing ABG’s 15% stake (Rs36/share) in great offshore on the CMP, giving a 20% holding company discount; based on this, our target price works out to Rs354 per share.

We recommend an Accumulate on ABG Shipyard. There could be another 25% upside to our fair value in case of a faster disbursement of subsidy.

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