8/7/2013 – Vard Holdings, formerly known as STX OSV, warns it expects Q2 FY13 profit to be lower than current consensus analyst estimates.
This is due to higher than expected cost overruns at its Niteroi yard as well as higher than expected start-up costs at its new yard, Promar.
Vard will now focus on stabilising the operations in Niteroi and ramp up its new yard.
OSK Research maintained its BUY rating with a target price of S$1.69.
It says the stock will face near-term pressure from a potential consensus earnings downgrade.
But the analyst thinks that it has somewhat priced in the negative news from Brazil.
Maybank Research has also maintained its BUY rating but target price is lowered to S$1.52.
The analyst remains firm in the view that better than expected order wins will drive FY14 recovery and valuations at current levels are still unjustifiably low.
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Question 1. Will Brazil drag down Q2 profit?
VARD is building five offshore support vessels (OSVs) in Brazil for DOF ASA and Siem Offshore.
One vessel had been delivered and the remaining four will be delivered in over the period of one year.
OSK Research sees 5% to 10% downside to its earnings forecast if the execution issues in Brazil are significantly worse than VARD’s Q1 FY13 guidance.
Question 2. What is the expected dent in EBITDA margin?
While Vard had previously flagged its troubles in Brazil, CIMB Research estimated that the group's EBITDA margins for 2013 could fall 2.2%-points YoY to 11%.
But it is now negatively surprised by the scale of underperformance from Vard's Brazil yards.
The operations seem far from stabilised and questions about management's handling of its affairs in Brazil will inevitably arise.
It now expects Vard to achieve EBITDA margins of 7.5% for 2013 and 9% for 2014.
Question 3. Will its share price rebound anytime soon?
The stock to come under heavy near-term selling pressure after the profit warning.
However, CIMB Research says a swift rebound could follow a couple of weeks later on positive news of sizeable pipe-laying support vessel (PLSV) orders.
Question 4. Has Promar yard commenced operations?
In Brazil, the new shipyard under construction, Vard Promar, was expected to start operations by end of June.
But Vard revised is estimates of start-up costs at the new shipyard.
This also leads to next question:
Question 5. What was the budgeted cost for Promar yard and how much did it go over the budget?
Question 6. Did the new owner of the company already know that problems are forthcoming?
The profit warning comes few months after the change in ownership to Italian shipbuilder, Fincantieri.
It had tried to take over the then STX OSV, but received only 4.9% of valid acceptances, bringing its shareholding to 55.6% from 50.75%.
In fact, the board of directors had recommended shareholders to reject the S$1.22 offer as it was not compelling.
Management reply: As VARD is currently in the blackout period pending the 2Q 2013 and half year results announcement, which will be released on 11 July 2013, we will not be able to offer any more information other than what has already been publicly announced. Any updates to the situation will be provided in a timely and accurate manner. Thank you for your understanding.
We thank management for its response
Key financial ratios
The ticks and crosses below indicate whether the stock meets the following value investing criteria.
Price-book: 2x - "Price is what you pay, value is what you get" - Are you getting more than you pay for?
Yield: 13.8% - Does the stock pay a risk premium over fixed deposit rates?
Cashflow: NOK992 mln - "Profit is opinion, cash is fact" - Is the company generating cash?
Total cash & equivalents: NOK2.4 bln - Does the company have cash?
Management: Vard Holding was not covered in the Governance & Transparency Index.
55.6% - Fincantieri Oil & Gas S.p.A.
Analyst survey by Reuters
Consensus call: OUTPERFORM
Price target: S$1.46