2014 to be a consolidation year
To say that 2013 was a rollercoaster year for Vard would be an understatement. The group underwent a change in majority owner, got hurt by Brazilian execution issues, opened its new Promar yard and clinched its biggest order yet. We expect 2014 to be a year of consolidation for the group as it delivers the problematic projects.
We maintain our FY13-15 EPS forecasts and target price, based on 9x CY15 P/E, 10% above its mean since IPO. Under our new rating structure, our call changes from Outperform to Add. Catalysts could come from stronger earnings and orders.
In terms of execution, 2013 was an annus horribilis for Vard as its Brazil operations were hampered by higher-than-expected outsourcing costs and lower-than-expected productivity while its Promar yard saw higher start-up costs. As a result, 9M13 earnings fell 64% yoy on 6.6% EBITDA margins (vs. historical average of 8-9%). We believe that earnings have bottomed out and project margins are set to recover as: 1) zero-margin projects in Niteroi are being flushed out, 2) operating leverage kicks in at the Promar yard, resulting in higher utilisation, 3) Vard scales up the learning curve for Transpetro orders, and 4) investment initiatives in its Romanian and Vietnamese yards pay off. Hence, we expect Vard to achieve EBITDA margins of 8% for FY14 and 8.3% for FY15.
Vard continues to be positive on its order intake for the remainder of FY13 and FY14. Demand for subsea vessels remains strong while the PSV market has been stronger than expected. The North Sea AHTS market is erratic, though it is under-invested. We are more conservative on orders and expect Vard to take in orders of NOK12.6bn for FY13, NOK10bn for FY14 and NOK12bn for FY15.
Add this world-class yard
Vard is trading at 8x CY15 P/E, a notch above Singapore-listed OSV builders (7x). Given its market leadership in high-end OSVs and entrenchment in Brazil, we believe that it deserves a higher valuation premium.
Publish date: 29/11/13