Vard Holdings Ltd:
STI : 3,205.29
Price Target : 12-Month S$ 0.84 (Prev S$ 0.92)
Brazil woes continue
•3Q13 results were again below expectations as losses persist at Brazil (Niteroi) yard
•Margins should recover hereon, but likely at a slower pace than previously estimated
•FY13/14F earnings cut by 24%/18%; order win expectations maintained
•aintain HOLD with lower TP of S$0.84
Brazil operations weigh heavy on margins. 3Q13 results disappointed again, with no significant improvement in EBITDA margin of 4.3% compared to 4.1% in 2Q13. While net profit of NOK76m represented a sequential turnaround from the NOK20m loss in 2Q13, this was mainly due to the absence of impairment losses. Revenue was down 4% y-o-y and net earnings were down 67% y-o-y as operational challenges at the Niteroi yard in Brazil continued, leading to further delays and cost overruns. The scheduled deliveries of the remaining 4 vessels from the Niteroi yard have now been moved back by at least a quarter on average and the losses there are likely to continue depressing group EBITDA margins over the next few quarters.
New order outlook still sanguine. At the end of 3Q13, Vard’s orderbook had expanded to NOK19.6bn, boosted by the NOK6.5bn pipelay vessel contract. YTDFY13, Vard has secured more than NOK12bn worth of new contracts, close to our new order win assumption of NOK12.5bn for FY13. We continue to expect good demand from the subsea support and construction vessels market, although AHTS and PSV orders from the North Sea could still be slow because of volatility in day rates. We continue to expect another NOK11bn/12bn in new orders for FY14/15.
But pace of recovery uncertain, maintain HOLD. While most of the cost overruns related to Brazilian yards have been provided for in 2Q13 and 3Q13, we are unlikely to see normalised margins anytime soon. The pace of margin recovery is still uncertain and as such, we cut our FY13/14F earnings by 24%/ 18% respectively to factor in lower margins and delays in orderbook recognition. Maintain HOLD with a lower TP of S$0.84 (pegged to 9x FY14 EPS).