- Downgrade to HOLD from BUY following deteriorating company & industry outlook.
- Promar’s teething problems could last longer than expected.
- Cut EPS on lower margins & contract wins. TP cut to SGD0.73 from SGD1.15, now on trough 1.0x FY15E P/BV from 1.4x.
Vard guided for a marginal 3Q14 EBITDA loss. While we initially saw a slower ramp-up at its Promar yard, its EBITDA-loss warning was still a shocker. A negative 3Q14 EBITDA margin would be even worse than its worst quarter’s 4.1% in 2Q13, when Niteroi cost overruns first surfaced. 3Q14’s EBITDA loss was blamed on:
• Slower-than-expected throughput and productivity gains during
Promar’s ramp-up in Brazil.
• Additional costs incurred for two LPG vessels in Promar’s order
book.
• Cost overruns for some European projects.
Vard, however, does not see a need to take provisions for the NOK200m tax claim from the Brazilian authorities — a silver lining.
Cut to HOLD
This is its second shocker after its 2Q13 profit warning following cost overruns at Niteroi. Vard’s recovery is now questionable, compounded by recent oil-price and deepwater weakness, which could affect its order intake. Execution would be closely scrutinised, near term. For now, we cut FY15E-16E new orders to NOK9.1b pa from NOK12.8b. We cut EBITDA margins to 4.1-6.2% from 6.7-10.4%. Consequently, our FY14E-16E EPS are down 41- 58%. Our TP drops to SGD0.73 from SGD1.15, now at its trough 1.0x P/BV, from 1.4x (-1SD of 4-year mean). With increased execution uncertainties, we downgrade it to HOLD from BUY. While more concrete signs of a recovery are needed to restore investors’ confidence, we believe its recent selldown has priced in most of its negatives.
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