Vard Holdings - RHB Securities 2015-09-29: The NOK Giveth And The USD Taketh Away


Vard Holdings (VARD SP) - The NOK Giveth And The USD Taketh Away 

  • Vard won contracts worth > USD100m for two light construction vessels from Topaz Energy and Marine, bringing YTD order wins to c.65% of our NOK3bn order win forecast for FY15. 
  • Despite the good news, we continue to be concerned about the weakening of the BRL vs the USD in 3Q15, which could lead to larger exchange losses than those suffered in 1Q15. 
  • Maintain SELL with a lower SGD0.32 TP (from SGD0.36, 27% downside). 

 Tough orders market, but Vard did it. 

  • Vard successfully clinched orders for two offshore subsea construction vessels (OSCVs) from a new customer, Dubai-based Topaz Energy and Marine, to be delivered in 3Q17 and 4Q17. The vessels are DP2-class, with 120-ton active heave compensated cranes of 3,000m working depth, and come with a 7.2 sq m moonpool. The vessels will be prepared for two remotely operated vehicles (ROVs), and will accommodate 82 persons each. 

 65% of win forecast. 

  • Penciling in NOK1bn for these orders, Vard has won c.NOK1.96bn in new contracts YTD, making up 65% of our NOK3bn full-year order win forecast. Even so, this represents a book-to-bill flow ratio of only 0.28x vs its estimated NOK10.9bn revenue for FY15F. 
  • As the orderbook diminishes over the next two years, the lower revenue recognition will create a negative operating leverage effect, crimping margins and the recurring operational bottomline. 

 High risk of sustained exchange losses. 

  • Recall that in 1Q15, Vard suffered a NOK171m exchange loss due to the 20% depreciation of the BRL against the USD. We now expect a loss of similar (or greater) magnitude in 3Q15, given that the BRL has depreciated 28% against the USD between 30 Jun and today (note: Vard’s 2014 annual report states that a 5% strengthening of the USD vs the BRL would lead to a NOK53m loss at the list-co). 
  • Although the weakening NOK gives Vard a small boost in reported earnings, the effect of the collapsing BRL is far greater. 

 Potential swing to loss this year. 

  • Given the large USD/BRL swing, we cut FY15 reported earnings estimate to a NOK72m loss from a NOK137m profit forecast. We lower our TP to SGD0.32 based on 0.55x P/BV (down from 0.6x). 
  • Investors should trim positions, taking advantage of the temporary euphoria over the order wins. 
  • Key risks are execution, order wins and its > 200% net gearing.

Lee Yue Jer CFA RHB Securities | 2015-09-29
UOB Kay Hian Analyst Report SELL Maintain SELL 0.32 Down 0.36