VARD Holdings

Kim Eng on 22 July 2014

• 2Q14 results disappointed on weaker-than-expected EBITDA margin due to teething issues at Promar yard.
• We see two bright spots: A turnaround at Promar yard in FY15E, and a significant risk reduction for its Niteroi yard.
• Forecasts cut by up to 6% on lower margin; TP trimmed to SGD1.25 (from SGD1.27), based on 1.4x FY15E P/BV.

Below ours but in-line with consensus estimates
While 2Q14 PATMI recovered 52.2% QoQ to NOK140m, the rebound fell short of our expectations. EBITDA margin disappointed, staying unchanged at 6.4% in 2Q14 (1Q14: 6.4%), after four consecutive quarters of improvement. This was mainly due to teething issues confronting its Promar yard in Brazil. With 1H14 PATMI accounting for 38% of our initial full-year forecast, we cut our FY14E/15E/16E forecasts by 6%/3%/2% on the back of a lower margin assumption.

Short-term pain could persist but not for long
Notwithstanding, we see a couple of bright spots:
1) Efficiency improvement at its European yards and higher utilisation for its Vietnam yard should cushion the operational drags emanating from the Promar yard. Management is confident of achieving profitability at its Promar yard in FY15E.
2) There is a significant risk reduction for its Niteroi yard now that the last sub-contracted hull was received with no additional provisions required.

We like Vard given its strong earnings visibility, supported by a large orderbook of NOK21.6b, and attractive valuations. The operating leverage should lift the FY15E/16E EBITDA margin to our revised 9.5%/10.7% (lowered from 9.8%/11/1%). Our revised TP of SGD1.25 (previously SGD1.27) is based on a conservative and unchanged 1.4x FY15E P/BV, which is one SD below its five-year historical mean. Maintain BUY.