Vard Holdings - DBS Research 2015-11-12: No turnaround in sight

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VARD HOLDINGS LIMITED MS7.SI 

Vard Holdings - No turnaround in sight 

• Higher-than-expected net loss of NOK486m in 3Q15 amid industry downturn and operational challenges. 
• Steep provisions made for cost overruns on LPG carrier projects at the Brazilian yards; turnaround in Brazil seems to be much further out than estimated. 
• Vard is looking at strategic review of business including potentially lower exposure to Brazil. 
• Maintain FULLY VALUED with lower TP of S$0.27. 

Highlights 

Steep losses now expected from LPG carrier contracts 

• Vard reported a negative NOK467m in EBITDA before restructuring cost for 3Q15, wiping out the Group’s positive NOK111m in EBITDA for 1H15, and translating into a net loss attributable to shareholders of NOK486m for the quarter. 
• While we were expecting losses, the magnitude of red ink this quarter was larger than anticipated, owing to sizeable provisions taken on the Brazilian operations, as the Group had to revise its operational targets and profitability expectations downwards – again – for the LPG carriers under construction at both Brazilian yards. 
• The vessels under construction at Promar yard, now have had their delivery dates deferred further, with one delivery now expected for 2015, one for 2016, and two each in 2017 and 2018. 

Order wins remain subdued 

• Vard has secured six order wins YTD in FY15. This brings YTD order wins to around NOK3bn, which is uninspiring when compared to historical full-year order wins of at least NOK9bn since 2010. 
• While the Group’s orderbook remains decent at NOK14bn, representing a ~1.3x book-to-bill ratio using annualised YTD revenues, this provides little comfort in the face of profitability headwinds from the Brazilian yards. 

Entry into new vessel markets provide a lifeline 

• Vard has suggested a pivot into new vessel segments such as aquaculture and fishing vessels, as well as placing greater importance in drawing on synergies with its parent Fincantieri, such as the awarding of larger cruise shipbuilding projects. This could provide the Group with new growth opportunities given the languishing AHTS and PSV markets, which have been weighed down by oversupply and dwindling demand. 
• Vard plans to announce a strategic overhaul and new business plan early next year, together with its full-year FY15 results. 

Outlook 

Brazilian operations should trigger further losses; low visibility on EBITDA margin recovery  

• While the company has not disclosed any information regarding the likely terms of extension of the LPG carriers’ delivery dates (they are still negotiating with Transpetro), late delivery penalties are expected. 
• Furthermore, in addition to higher financing costs arising from a push-back of construction loan maturities, which are aligned with vessel deliveries, we think penalties on loan extensions could also surface. 
• Management is also increasingly more conservative on the earnings potential from the two pipelay vessels in Vard Promar’s orderbook. 
• In the longer term, it is unclear if this round of provisions – which were substantial – represents an attempt to wipe the slate clean by taking a big one-time hit to the bottom line, and dialing back to conservative levels on internal assumptions for the LPG projects, or if further provisions will continue to be taken in the future. 

Will Vard consider exiting Brazil? 

• As part of the ongoing strategic review process, management has indicated the possibility of reducing its exposure to the Brazilian operations, which could imply full or partial sale of its stakes in the Brazilian yards. Thus, if operating and financial performance continues to be unsatisfactory in Brazil, impairments on the value of the yards (net property plant and equipment worth about NOK950m) could be on the cards. 

New offerings will bring new learning curves to conquer 

• While Vard’s plan to pursue orders from new markets and leverage its relationship with Fincantieri (which could help address the declining utilisation at the European yards via greater work awarded for cruise liner shipbuilding work) is understandable, we think margins are unlikely to be high – if even positive – at the start, as these vessels will have learning curves of their own which could stifle profitability, at least in the early stages. 

Now expecting losses to continue in FY16 

• Owing to continued cost overruns and the deferments in delivery schedules of the LPG carriers in Brazil, we now expect Vard to continue posting losses well into 2016. For FY15 and FY16, we now project net losses of NOK581m and NOK201m respectively. Valuation: In light of uncertain order win outlook and weak earnings trajectory hereon, we maintain our FULLY VALUED call with a revised target price of S$0.27, based on a lower peg of 0.6x FY15 P/BV, which reflects the losses expected in FY15/16. The possibility of further cost overruns at the Brazilian yards, potential penalties and impairments on assets and the weak Kroner will weigh on sentiments in the near term. 

Key Risks: 

Upside risks: earnings rebound, order pick-up, corporate activity. 

• The key risk to our FULLY VALUED call is if m activity argins recover and order win momentum builds up significantly earlier than we anticipate, which could help re-rate the stock. 
• A sharp oil price recovery will also boost share price. 
• Any corporate activity related to majority shareholder Fincantieri in terms of buying additional stakes in the company at premium valuations could also be an upside catalyst.

Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2015-11-12

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.27 Down 0.38