VARD HOLDINGS LIMITED
MS7.SI
Vard Holdings Ltd - Brazil proves insurmountable
- Per its earlier profit guidance, Vard recorded a core net loss of NOK203m for 3Q15 (9M15: NOK15m core loss: 3Q14: NOK24m core loss).
- Vard Promar was the main culprit. Elsewhere, the group was EBITDA-positive.
- Vard undergoing comprehensive strategy overhaul; Brazil under review.
- Expect losses in FY15-17 and lower TP, now based on 0.5x CY16 P/BV.
■ Vard Promar the main culprit
- The main culprit was losses from LPG carriers at 50.5%-owned Vard Promar. This was also reflected by the non-controlling interest share of loss of NOK359m, the largest ever. There has been further pushback for the deliveries of the LPG carriers (refer to Fig 8).
- Vard Niteroi also suffered some cost overruns and delays for its last AHTS due to be delivered in 1H16. Management also shared that the pipelayer projects are currently recognised at cost estimates, i.e. no profits recognised yet.
■ Elsewhere, the group was EBITDA-positive
- Overall, the group recorded –NOK356m EBITDA and -4.6% EBITDA margin for 9M15. Besides Brazil, the rest of the group contributed positive EBITDA, both on a quarterly and YTD basis. However, the European operations’ margins were weaker vs. 2014 owing to operating leverage effect.
- Vietnam was the bright spot, with stable operations and good yard utilisation.
■ Operating cash burn
- Given the longer cash conversion cycle (deliveries deferrals plus certain projects require significant amount of working capital) as well as loss-making operations, Vard incurred NOK1.1bn operating cash outflow for 9M15 (9M14: +NOK314m).
- Excluding construction loans, net gearing increased to 0.3x (end-2014: net cash). Vard expects cash to be freed up in 2H16 after deliveries of the working capital-intensive projects.
■ As at end-3Q15, order book stood at NOK14bn, -21% YTD
- The group secured NOK1.4bn orders in 3Q15, and NOK2.6bn for 9M15 vs. our FY15 expectation of NOK4bn. As gleaned from the order intake, Vard is targeting new clients and also diversifying into the fisheries and aquaculture market. Its core OSV products (AHTS and PSVs) continue to be weak but the group sees some pockets of opportunities in the subsea light construction segment.
■ Comprehensive strategy overhaul; Brazil under review
- In view of the severe cyclical downturn, Vard has initiated a strategy overhaul. It is seeking more diversification from the cyclical oil & gas market and is targeting more synergies with its parent, Fincantieri. For example, the cruise ship market is in positive territory and Vard’s Romanian yard has fabricated steel sections for Fincantieri cruise projects.
- Lastly, its exposure to the Brazil market is under review. Cornerstones of the new business plan are expected to be announced together with FY15 results.
■ Expect losses for the next three years; reiterate Reduce
- Brazil has proven to be insurmountable and we are now expecting losses in FY15-17.
- We reiterate our Reduce call, now based on 0.5x CY16 P/BV as we rollover our target valuation to end-2016, and expect valuations to test new lows (previously 0.6x CY15 P/BV). TP S$0.23.
- Upside risk could come from potential privatisation by parent, Fincantieri.
YEO Zhi Bin
CIMB Securities
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http://research.itradecimb.com/
2015-11-11
CIMB Securities
SGX Stock
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