Vard Holdings

Don?t Miss This Distressed Play

Investment thesis

Vard has carved a niche for itself as the builder of highly complex and

high-end OSVs. The company has suffered a loss in confidence from

cost overrun issues at its Niteroi yard in Brazil due to work overload and

outsourcing woes. With the share price down 39% YTD, we see Vard

as a distressed play poised for a rebound when it can deliver margin

and earnings turnaround in 2014. Our confidence stems from (1) its

strong order win momentum, (2) bottoming out of margins in 2Q13, and

(3) undemanding valuations at 6.4x FY14F PER.

Order win momentum was particularly strong in FY13 with NOK12.4b

worth of orders secured YTD, lifting outstanding orderbook to about

NOK20b, the highest level since 2009. We are optimistic that orders

would continue to flow based on our thesis of a cyclical rebound in the

OSV market. Meanwhile, demand from the offshore construction vessel

(OSCV) market remains firm due to a shortage of high-end and capable

subsea construction vessels to meet the expected increase in subsea

activities over the next few years.

Valuation and recommendation

We value Vard based on 8x PER on average FY13F-15F earnings. At

the current price, the stock is trading at a cheap 6.4x FY14F PER,

substantially below its peers. Reiterate BUY in anticipation of a

turnaround in FY14.

Risks to our view

(1) Further cost overruns in Niteroi yard. (2) Weak execution at new

Promar yard in Brazil. (3) Order momentum in FY14 fails to keep up.

Catalysts

(1) Margin recovery on resolution of Brazil yard issues. (2) Strong order

win momentum as OSV market stages a cyclical rebound.

Vard Holdings ? Summary Earnings Table

FYE Dec (NOK m) FY11 FY12 FY13F FY14F FY15F

Revenue 12,401 11,129 11,006 12,527 15,826

EBITDA 2,355 1,473 743 1,138 1,665

Recurring Net Profit 1,594 902 371 720 1,018

Recurring Basic EPS (cents) 135.1 76.4 31.4 61.0 86.2

EPS growth (%) 34.3 (43.4) (58.9) 93.9 41.4

DPS (SG cents) 15.0 13.0 2.0 4.0 6.0

PER 2.9 5.1 12.4 6.4 4.5

EV/EBITDA (x) 3.4 5.4 10.7 7.0 4.8

Div Yield (%) 18.9 16.4 2.5 5.0 7.5

P/BV(x) 1.3 1.5 1.5 1.3 1.0

Net Gearing (%) (12.1) 47.2 70.9 68.1 58.0

ROE (%) 54.1 27.0 12.0 21.7 25.2

ROA (%) 12.7 7.0 2.8 5.2 6.4

Consensus Net Profit (NOK m) 381 590 495

Source: Company, Maybank KE estimates