Vard Holdings Ltd -
Buy ahead of earnings recovery
While Vard's 3Q earnings miss of 5% was hardly inspirational, it cannot be argued that the company is in a downward spiral either. We expect a 2-year EPS CAGR of 15% in FY13-15 due to margins recovery. Catalysts could come from stronger earnings and orders.
At 60% of our FY13 EPS, 9M13 was 5% below our and broadly in line with consensus. We cut our FY13 EPS to factor in the miss and adjust our FY14/15 EPS by +7%/-19% as we cut our orders outlook and adjust our order recognition schedule. We upgrade to Outperform from Neutral as we think that earnings have bottomed out. Our target price rises as we roll forward to 9x CY15 P/E (10% above its mean since IPO).
3Q earnings bottomed out
Owing to the lower-than-expected turnover and the corresponding operating leverage effects, Vard recorded NOK66m core earnings (-71% yoy) for 3Q. We note that the low turnover was somewhat due to seasonality and expect a stronger 4Q. While continued delays and cost overruns for the Niteroi yard are hardly inspirational, it cannot be argued that the company is in a downward spiral either. In fact, EBITDA margins improved slightly by 0.2% pts qoq to 4.3% while the group achieved gross margins of 31.4% vs. our forecast of 26.2%.
Record orders in 3Q
Thanks to the record-NOK6.5bn pipe lay support vessel order, Vard secured NOK8bn orders in 3Q, bringing the YTD orders to NOK11.9bn. The current order book stands at NOK19.5bn, or 1.6x book-to-bill.
Outperform premised on conservative grounds
Our 9x CY15 P/E-derived target price factors in a recovery of EBITDA margins to 8.3% for FY15, 8% for FY14 and 6.7% for FY13 (within the company's historical average). We expect margins to improve due to 1) zero-margin projects in Niteroi being flushed out, 2) higher utilisation at the Promar yard, 3) scaling of the learning curve for Transpetro orders and 4) investment initiatives in its Romanian and Vietnamese yards paying off.
Publish date: 06/11/13