Vard 3QFY: Brazil Woes May Spill Over To FY14
(NEUTRAL, SGD0.83, TP: SGD0.85)
VARD’s 3Q13 earnings of NOK76m (-67% y-o-y) were disappointing, as was its 4.3% EBITDA margin vs our estimate of 7.6%. While its results were better than its 2Q13 net loss of NOK20m, margins improved only slightly as its Brazil unit continued to weigh on overall profit. We cut our FY13-15F EPS by 15-23% and downgrade the stock to NEUTRAL, with a lower SGD0.85 TP (from SGD1.10), based on a 10x FY14F P/E.
Margins thin as Brazil unit remains loss-making. VARD Holdings (VARD)’s 3Q13 net profit of NOK76m (-67% y-o-y) brought its 9M13 earnings to NOK244m (-69% y-o-y), below our and consensus estimates, owing to weak margins. Its 3Q13 EBITDA margin came in at 4.4% vs 4.1% in 2Q13. There was little sequential improvement in margins as the company’s Brazil operation remained loss-making.
Drag from Brazil likely to extend into FY14. Vard Niterói is still plagued by delays and cost overruns although management has implemented organisational changes at the yard. Delivery of its remaining four vessels (Pro30, Pro31, Pro32, Pro33) are further delayed by 2-3 months each, with the last vessel expected to be delivered in 1Q15. We think VARD’s Brazil woes may extend into FY14.
Bullish on new orders. VARD saw strong orders in 3Q13, winning NOK7.95bn worth of contracts. Its YTD 2013 new orders worth NOK11.9bn are close to our target of NOK12bn, while its net orderbook stands at NOK19.6bn. Management is positive on securing more orders.
Lowering FY13-15F EPS by 15-23%. We downgrade FY13/14/15F EPS by 15/23/23% respectively on lower EBITDA margins. We are projecting for FY13/14/15F EBITDA margins of 6.7/7.5/8.2%. While management is bullish on the outlook for orders, we believe that pricing will face growing competition from European and Asian yards.
Downgrade to NEUTRAL, with SGD0.85 TP. We see little near-term catalysts. The new order wins may be positive but the market is likely to keep a close watch on VARD’s margins over the next few quarters, which we believe will be lower than its historical long-cycle average of 8-10%. Our SGD0.85 TP is based on a 10x FY14F P/E.
Publish date: 07/11/13