1Q14 results in line with PATMI of NOK92m making up 15% of our and 16% of consensus forecasts.

EBITDA margin saw a third consecutive quarter of improvement to 6.4%.

Selldown unwarranted. Maintain BUY and TP of $1.07, based on 1.4x FY14E P/BV, 1SD below its historical mean.

What' s New

Vard reported 1Q14 PATMI of NOK92m (-51.1% YoY, -18.6% QoQ), meeting 15% of our and 16% of consensus forecasts. Despite the sharp decline, we consider the results in line with our expectations and anticipate improvements over the next few quarters. On a pre-tax basis, EBT rose 36.8% QoQ as there was a NOK19m tax write-back in 4Q13. More importantly, EBITDA margin continued to climb higher for the third consecutive quarter, rising 1.3ppt to 6.4%.

What' s Our View

Following yesterday' s non-deal roadshow for Vard, we are even more confident of the company' s recovery. No further provisions were taken in the Niteroi yard while the Promar yard is ramping up according to plan. Management guided for long-term sustainable EBITDA margin of 8-10%, which is in line with our forecasts of 7.9%/9.8% for FY14E/15E.

1Q14 saw an exceptionally high level of order intake of NOK5.5b, achieving 43% of our full-year forecast of NOK12.8b. While this cannot be extrapolated, management is still optimistic on further order wins. Net orderbook is at a five-year high of NOK21.8b, providing strong earnings visibility for the next two years and support for the anticipated recovery. Vard is most positive on the OSCV market, citing opportunities even for AHTS and PSV vessels.

We keep our forecasts intact and view the selldown on the stock as unwarranted. Maintain BUY and TP of $1.07, pegged to 1.4x FY14E P/BV, which is 1SD below its historical mean

Source: Maybank Kim Eng Research

• 1Q14 PATMI slips 51.1% YoY
• Brazil operations improving
• Strong orders intake

1Q14 results below expectations, but not as bad as it seems

Vard 1Q14 revenue declined slightly by 2.7% YoY to NOK2.67b, meeting 21.3% of our FY14 forecast. PATMI slumped 51.1% YoY to NOK92m, forming just 15.5% of our full-year estimate. Although we expect a much stronger 2H, this set of earnings still came in below our expectations. This was driven largely by higher depreciation expenses and staff costs due to headcount increase at its new Promar yard (number of employees rose from 190 in 1Q13 to 1,210 in 1Q14). On a positive note, Vard recorded a third consecutive quarter of EBITDA margin improvement QoQ (1Q14: 6.4%). Its PBT was also 36.8% higher on a QoQ basis. While we continue to expect FY14 to be a year of recovery for Vard, we see the need to pare our FY14 and FY15 PATMI projections by 10.1% and 2.2%, respectively.

No provisions for contract losses made in 1Q14

Vard has continued to work through its issues in Brazil, and we believe it now has better control over the situation. Encouragingly, management highlighted that no provisions for contract losses were made in 1Q14. While Promar continued to incur start-up losses, operations are in the process of being ramped up and completion of the yard will happen in Jul 2014.

Maintain HOLD

Another positive trend was Vard' s significant orders intake of NOK5.53b (eight vessels) in 1Q14, which boosted its order book value to NOK21.84b, as at 31 Mar 2014. Management did, however, caution that this round of order wins should be considered as exceptional. Still, we believe the worst is over for Vard. Given a positive industry outlook created by increasing demand in Arctic regions and the subsea support and construction vessel segment, we believe Vard' s recent strong order wins reflect its solid core competencies within the high-end support vessels segment. Hence we believe it deserves a higher target PER peg of 9x (previously ascribed a conservative 8x peg). Applying this to our revised blended FY14/15F EPS forecast, we derive a new fair value estimate of S$0.97 (previously S$0.84). But we maintain our HOLD rating given the limited upside potential.

Source: OCBC Research     ...last:$0.965...