1H13 core profit accounted for 31% of our FY13 estimate. Despite our 14-22% EPS downgrades for FY13-15, we upgrade Vard from trading sell to Neutral as we believe the 23% share price fall since its profit guidance has priced in its Brazilian woes. We lower our target price, now based on 9x CY14 P/E, a 10% premium over its post-IPO mean. We previously applied 9x to CY13 EPS, expecting investors to focus on the near term.

Brazilian woes

2Q13 results fell short of our expectations, affected by 

1) NOK70m write-down of remaining goodwill related to the Niteroi yard in Brazil, 

2) high effective tax rate due to Niteroi’s losses, without the corresponding deferred tax asset recognised. 

1) lower-than-expected productivity, 

2) additional costs for outsourcing the LPG hulls to subcontractors, and 

3) unexpectedly high start-up costs for the new shipyard, Vard Promar. Vard recorded 4.1% EBITDA margins in 2Q13 and 7.5% in 1H13. 

In addition, Brazilian deliveries have been pushed back, which will affect FY14 performance. The Brazilian AHTS/PSVs will now be delivered by 4Q14 (previous guidance: 1Q14), which will drag on the group’s margins. We cut FY14 EBITDA margins from 9% to 8% vs. its historical range of 9-10%.

In 1H13, Vard secured NOK3.99bn orders or 36% of our FY13 order target of NOK11bn. Its order book now stands at NOK13.95bn. The order refill rate has been slow though management is still upbeat on the order outlook. 

Petrobras recently dished out contracts for six pipelaying support vessels, with construction at Dutch shipbuilder, IHC Merwede. Vard is also eyeing a piece of the action. We cut our order target for FY14 from NOK12bn to NOk11bn. (Read Report)