MER says Vard has enough ammo for sharp turnaround

Event
VARD held an analyst meet at 10am on 25 Feb in Singapore. The CEO of VARD, Mr Roy Reite, outlined VARD?s vision for 2014 and beyond.
 
MER expects a sharp turnaround in VARD?s profits (+57% in 2014 and +36% in 2015) driven by an all-time high order book of NOK22bn (as of Feb ?14) and the phasing out of Brazil issues over the next 12 months.
 
MER thinks VARD could deliver ~30% stock return over the next 12 months on better quarterly results, robust profit growth and orders beating street estimates. MER sees a gradual upgrade cycle playing out in 2014.
 
Impact
Brazil will gradually become less of a thorn and more of an asset:  With 2013 behind VARD, Brazil operations are more under control now. VARD is focusing majorly on Brazil in 2014 and making Promar the best yard in Brazil.
 
Niteroi vessels:  Through pictures, VARD showed that, in contrast to the street?s scepticism, great progress was made on 3 vessels at Niteroi. The first is ready for delivery in March ?14. The 2^nd  and 3^rd  ones are outfitting at quayside. All 4 vessels are on track for delivery from 1Q14-1Q15.
 
New Promar shipyard:  The start-up has been better than the company had expected, with excellent feedback from clients. The first vessel is already under construction. VARD seems to be in much better control at this yard.
 
Shutting down of Nietroi:  VARD is still weighing its options: to let the yard lease expire in 2015, or to renew the contract and add more jobs.
 
Bigger and more customized vessels and larger customers is the focus:    Aided by the new parent, VARD is focusing on complex high-end vessels to create a niche, and is now winning orders from large international players like Technip, Bourbon Offshore and Harkand Group.
 
Improving outlook on anchor handling tug supply vessel (AHTS) and platform supply vessel (PSV) segments:  While PSV orders will remain piecemeal for a while, more customized AHTS orders could gradually see a return from 2H14, according to the CEO.
 
Expansion plans and dividends:  VARD is not looking for any greenfield expansions until Brazil comes under control. On dividends, the company will pay a minimum of 30% of profits starting 2014.
 
Earnings and target price revision
MER raises earnings per share estimates by 2% each for the next 2 years, and raises target price to S$1.15 from S$1.00 earlier.
 
MER?s action and recommendation
Valuations present favourable risk-reward:    At a price to earnings (P/E) of 6.5x and price to book value (P/BV) of 1.1x on 2015E and with return of equity (ROEs) improving to ~18%, MER thinks VARD presents an attractive risk-reward now.