Target Price: SGD1.10
Hard Times In Brazil But 2Q13 Could Be Bottom
We hosted Vard for a two-day non-deal roadshow in Singapore with >30 analysts and fund managers where interest was strong, with a focus on the negative surprises in Brazil. While Vard has taken a beating post its 2Q13 results, its FY13F valuations at 9.4x P/E and 3.7x EV/EBITDA (ex. construction loans) are attractive. We expect it to rebound on potential new orders in Brazil and signs of margin stabilising from 3Q13.
• Provisions taken on best estimates. We estimate Vard took a ~NOK200m provision for the delays and cost overruns in Brazil and NOK70m in goodwill write-down for Niterói. Making adjustments for the provisions, operations outside Brazil is stable, with an estimated EBITDA margin of 10%-11%. Management explained that it has taken the provisions based on its best assessment of the situation in Brazil and that it has made significant changes to its productivity assumptions.
• NOK650m outstanding orderbook remaining at Niterói. Four vessels are still under construction, with the last unit to be delivered in 4Q2014. These orders are expected to have zero margins until completion.
• Two more hulls under sub-contract. The liquiefied petroleum gas (LPG) hulls will delivered to the company’s new 50.5%-owned shipyard, Vard Promar, by end-2013 and early-2014. Starting from the third LPG unit, all major structures will be fabricated in-house, given that Vard Promar has started its operations in June 2013.
• Potential Brazilian orders valued at up to NOK6bn. Petrobras (PBR) has awarded charters for three pipelaying support vessels (PLSVs) to Sapura Navegaca and three PLSVs to Subsea 7. Upstream reported PBR is in negotiation with Technip-DOF JV to charter four PLSVs with two 300-tonne units to be built at Vard Promar and two 650-tonne units at Vard’s yard in Norway. We estimate the total value of these four PLSVs at around NOK6bn (USD1bn).
• Maintain Buy with SGD1.10 TP. Vard’s share price has been severely hit following weak 2Q13 results. However, we see catalysts in the form of order wins and recovery of investor confidence in the stock once the worst is proven to be over.
How big is Brazil to Vard? While the Brazilian market has generated a lot of excitement due to the heavy spending by Petrobras, the contribution from Brazil to Vard’s overall topline remains fairly small. From 2010 to 2012, shipbuilding in Brazil only accounted for 12% to 16% of its total revenue.
Four more vessels at Niterói. Vard saw significant delays in the construction of five vessels at its Niterói yard in Brazil. One vessel has been delivered in 2Q2013 and four more vessels, with an outstanding order value of NOK650m, are scheduled for delivery in 4Q2013, 1Q2014, 2Q2014 and 4Q2014 respectively. Management saw decreading productivity at Niterói, leading to revision in productivity assumptions for the ongoing projects and provisions for losses. We have assumed zero EBITDA margins for the remaining orderbook in our earnings model.
Second yard in Brazil started commercial operations. Vard Promar, a new yard which is 50.5% owned by Vard, has started commercial operations in June 2013, and will be working on the NOK3bn LPG projects to build up the base load. We expect Vard Promar to hit full output in 2H2014.
No delay for LPG but still relying on subcontractor for two hulls. Vard is relying on Rio Nave for the construction of the first two LPG hulls, which are scheduled to be delivered to Vard Promar by end-2013 and early-2014 respectively. No delays were reported for the LPG projects. We are conservative in our assumption for the LPG projects with zero EBITDA margin on the first three units due to the initial learning curve for a new product and 5% for the next five units.
Maintain NOK12bn order win forecast for 2013. YTD 2013, Vard has secured close to NOK4bn of new orders and Management is confident of winning more orders in 2H13, especially for offshore subsea construction vessels (OSCVs). Demand for anchor handling tug and supply (AHTS) vessels is improving, given fewer newbuilds are coming into the market in the next 12 months, but the demand for platform supply vessels (PSVs) remains lukewarm. We stick to our forecast of NOK12bn new orders in 2013 as we expect the large order from Petrobras to be confirmed in 2H13.
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Publish date: 05/08/13