Written By Stock Fanatic on Wednesday, February 26, 2014

What surprised us
Vard reported 4Q13 core (ex-impairments and FX) net profit of NOK138mn. FY13 core net profit of NOK445mn was 116% of both GSe/ Bloomberg consensus ? above expectations. 4Q13 beat was from revenues, whereas EBITDA margins came in slightly below our expectations at 5.1% (GSe 5.5%) as its troubled Niteroi yard faced further delays and cost overruns. EBITDA margins, however, improved from 2Q/3Q13 levels of 4.1%/4.3%.

Looking ahead, Vard expects: 
(1) Niteroi operation/losses to stabilize further as they have improved control over certain input costs qoq and as they finally deliver the challenging Pro 30 vessel in March, which they expect should drive a step up in their learning curve for this product, and be reflected in the profitability for subsequent deliveries of the same vessel type (i.e., Pro 31-33). Vard, however, still expects Niteroi to be loss making through 2014

(2) Promar to ramp up operations and profitability through 2014. Indeed, if we infer through minority interests, Promar?s losses have narrowed further in the past two quarters and we are hopeful of marginal profits by 2H14

(3) Phase 1 upgrades to Norway / Romania yards are close to completion, which Vard views as positive for cost structure

(4) Vietnam operations to improve with the recent PSV contract secured in Feb

(5) 2014 EPS to be higher than 2013 and

(6) Positive orders outlook especially from OSCV and AHTS. YTD, Vard has won c.NOK2bn, or 17% of GSe FY14E.

Technical Analysis

Daily Chart

What to do with the stock

Maintain Buy. We fine tune 2014-15E EPS and introduce 2016E EPS. Our EV/CGI-CROCI/WACC-based 12-m TP is unchanged at S$1.00.

Key risks:
(i) Lower-than-expected oil price and oil majors? capex

(ii) stronger-thanexpected competition

(iii) worse-than-expected challenges in Brazil. (Read Report)

 

 

Uninspiring results, but risk-reward is favourable

At 95% of our full-year forecast, Vard?s FY13 core net profit was broadly in

line with our and consensus's expectations. We consider its 4Q13 core net

profit of NOK140m (+91% yoy) to be lacklustre and not the spark needed to

catalyse the share price. That said, we believe that earnings have bottomed

and expect 2014 to be a consolidation year. We cut FY14 EPS by 6% for lower

margins but lift FY15 EPS by 5% as higher revenue could more than offset the

lower margins. We also introduce FY16 numbers. Our target price, still based

on 9x CY15 P/E (mean since IPO), rises in tandem. We maintain our Add call

as we think that an earnings recovery is not priced in and the risk-reward is

skewed positively. Catalysts could come from stronger earnings and orders.

Brazil woes linger

4Q13 was another challenging operational quarter for the group. Its Nietroi

yard continued to incur cost overruns (materials costs' line item was hit by an

additional 3-digit figure), marking the third consecutive quarter of such

overruns. The consolation was a gradual improvement in the group?s EBITDA

margins (4Q13: 5.1% vs. 3Q13: 4.3%). Vard achieved an EBITDA margin of

6.1% in 2013 and we expect this to hit 7% for 2014 as 1) its zero-margin projects

in Niteroi are being flushed out, 2) operating leverage kicks in as the Promar

yard ramps up, and 3) investment initiatives in its Romanian and Vietnamese

yards pay off. We expect EBITDA margins to normalise to 8% for 2015 (the

 

 

long-term average) as the last of the four problematic projects will be delivered

in 1Q15. Another negative was the absence of dividends but we expect the



 

30%-payout to resume in 2014 as the group?s financial performance improves.



 

 

 

Expect NOK10bn orders for 2014



 

 

The brightest spark for the group was the record order intake of NOK14.2bn in

2013 (4Q:NOK2.2bn), the highest since the last peak in 2007. Its order book

stands at NOK19.4bn (the highest since 2008), equivalent to 1.75 years of

revenue. The group maintains its positive stance for the 2014 order momentum.

We are more conservative and expect NOK10bn in orders for 2014.



 

Favourable risk-reward



 

 

Our bear-bull scenario analysis shows that the risk-reward is favourable as we



estimate a weighted upside of 18%.

long-term average) as the last of the four problematic projects will be delivered

in 1Q15. Another negative was the absence of dividends but we expect the



 

30%-payout to resume in 2014 as the group?s financial performance improves.



 

 

 

Expect NOK10bn orders for 2014



 

 

The brightest spark for the group was the record order intake of NOK14.2bn in

2013 (4Q:NOK2.2bn), the highest since the last peak in 2007. Its order book

stands at NOK19.4bn (the highest since 2008), equivalent to 1.75 years of

revenue. The group maintains its positive stance for the 2014 order momentum.

We are more conservative and expect NOK10bn in orders for 2014.



 

Favourable risk-reward



 

 

Our bear-bull scenario analysis shows that the risk-reward is favourable as we



estimate a weighted upside of 18%.

 

 

 

 

 

Downside risks stem from continued poor execution at its Niteroi yard and

new problems at its Promar yard (i.e. cost overruns for the two



 

sub-contracted LPG carriers? hulls or

engineering/technical issues). EBITDA margins could remain depressed at 7%

for 2015.

Upside risks spring from better execution, better profitability of orders

due to a full order book (Vard is able to cherry-pick projects) and better

productivity from its Romanian and Vietnamese yards due to earlier

investment initiatives. Before the issues in Brazil erupted, the group had guided

for EBITDA margins to be in the low-teens



  https://brokingrfs.cimb.com/

 

 

 

 

 

cost overruns at the Niterói yard in Brazil continue to weigh

on overall margins. EBITDA margin was 5.1% for 4Q2013.