Vard Holdings - DBS Research 2015-10-16: More pain in the offing

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VARD HOLDINGS LIMITED MS7.SI 

Vard Holdings - More pain in the offing 

• Issues profit warning to flag worse-than-expected results in 3Q15/ FY15 
• Facing steeper-than-expected learning curve for later production stages of LPG carriers at Promar yard in Brazil 
• We cut earnings to now reflect net losses for 3Q15 as well as full-year FY15 in view of operational challenges 
• Downgrade to FULLY VALUED, TP S$0.38 

Chances of more red ink. 

• Vard issued a profit warning with regards to its upcoming 3Q15 results where it noted that the operational challenges in Brazilian yards have continued and had a bigger-than-expected negative impact on profitability during 3Q15. This will materially affect numbers for full-year FY15 as well. 
• Under the circumstances and following checks with management, we now expect another round of red ink for Vard in 3Q15, with a likelihood of losses at the EBITDA level as well, as seen in 3Q14. 

New yard in Brazil a recurring headache. 

• To recap, Vard is in the process of building six LPG carriers at its new Promar yard in Brazil (the other two in Niteroi), and is at the later production stages of the first few vessels. This is where we believe the learning curve has turned out steeper than earlier envisaged, and Vard may have incurred additional cost overruns owing to fairly inexperienced staff and supervisors. It is now reasonable to expect delays in the LPG carrier delivery schedule. 
• The one silver lining is that despite political and economic issues in Brazil and Petrobras, there have been no problems in payments so far from customer Transpetro. 

Downside risks to earnings, order wins. 

• We now expect Vard to record a net loss of NOK76m in FY15, and breakeven at best in FY16 if Brazil performance improves to an extent (from NOK100m and NOK73m net profit earlier respectively). 
• The other big concern for Vard is the slowdown in order wins with low oil prices affecting demand for deepwater offshore vessels. YTD in FY15, Vard has secured only about NOK1.8bn new contracts, and we lower our FY15/16 new order win assumptions from NOK5bn/7bn to NOK3bn/5bn respectively. Vard may be looking to further diversify its product offerings but that would involve a learning curve as well. 
• In light of the uncertain outlook and earnings downside risks, downgrade to FULLY VALUED; TP of S$0.38 pegged to 0.7x P/BV.

Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2015-10-16

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