Stuck in mire
- At 18% of our FY15 forecast (1H formed 54%), 2Q15 core net profit of NOK63m (-55% yoy) was broadly in line with our and consensus expectations.
- However, the results were hardly inspiring, with EBITDA margin falling to 1.8% (1Q15: 2.1%; 2Q14: 6.4%).
- Vard only delivered a positive core net profit for shareholders after excluding FX losses and backing out losses attributed to minority interests.
- The rapidly declining order book is also at the forefront of our worries.
- We cut our FY16 EPS by 42% and now forecast losses for FY17 as we reduce our assumptions for order wins and margins.
- Our target price is trimmed to S$0.35, still at a justified 0.6x CY15 P/BV.
- Vard remains a Reduce given the potential negative triggers of an order drought and continued weak execution.
Brazil stuck in mire
- Dragged down by continued losses from its Brazil operations, Vard recorded 1.8% EBITDA margin in 2Q.
- Gleaned from losses attributed to minority interests, Vard Promar did not registered improvements and was weighed down by further delays for the LPG carriers.
- A slight consolation was the delivery of the first LPG carrier to Transpetro in Jul and good progress of the pipe layer projects.
- Vard Niteroi also incurred losses and cost overruns are expected to continue until delivery of the last AHTS towards year-end.
- The yard is being downsized in tandem with decreasing workload.
- The lease for Niteroi expires at end-2016 and Vard has not reached a final decision on the yard.
Europe suffering from under-utilisation
- Activity levels at its European yards have started to decline due to the shortfall in orders. As a result, Europe’s margins were also lower than previous years’.
- The lower utilisation is expected to accelerate through 2H15 and 1H16.
- Vard has initiated cost cutting and capacity adjustments to lower utilisation rates.
Cutting order wins and margin assumptions
- Order book at end-2Q15 stood at NOK13.9bn, down 10% qoq and 36% yoy.
- The rapidly declining order book (1x book-to-bill) is our gravest worry.
- YTD, Vard has secured NOK1.2bn of orders, mainly due to the dive support vessel order from Kreuz Subsea.
- We cut our FY15 new order estimate from NOK6bn to NOK4bn and our FY15 EBITDA margin estimate to 2% from 3.8%.
- With significant cash tied up in working capital and requirements expected to rise through 1H16 (1H15 had NOK 1bn operating cash outflow), we do not expect Vard to pay dividends, especially as profitability is also weak.
(YEO Zhi Bin)
Source: http://research.itradecimb.com/
