Vard Holdings - RHB Invest 2015-11-12: Slow Orders? Go Fishing!

VARD HOLDINGS LIMITED MS7.SI

Vard Holdings (VARD SP) - Slow Orders? Go Fishing!

Vard reported a surprisingly large 3Q15 PATMI loss of NOK486m.
Maintain SELL with a lower SGD0.29 TP (from SGD0.32, 19% downside).
While we had flagged large forex losses in our 29 Sep report, the negative shock came from additional provisions in Brazil. It is putting those operations under a strategic review, and a new business plan (likely involving parent Fincantieri) would be revealed together with its FY15 results.

Vard said that its “other operations were EBITDA positive”. The underperformance and additional loss provisions made for cost overruns and delays in Brazil, pushing the group to a -20.6% EBITDA margin.
Our earnings estimates are slashed from its core (excluding exchange losses) of NOK140m/NOK105m to NOK-183m/NOK66m for FY15/16F respectively. The book value erosion and increasing working capital requirements pushed Vard to a 301% net gearing position.
Orders for 3Q15 were NOK1,436m (which included two fishing-related vessels), with a total of NOK14.0bn backlog.

Vard is discussing terms with Petrobras Transporte SA (Transpetro) to delay all its remaining liquefied petroleum gas (LPG) vessels under construction, due to the unsatisfactory progress at the yard.
Management indicated that the visibility and predictability were negatively impacted by the overall economic and political environment in Brazil. It also guided that the client relationship was challenging. If penalties for delays exceed estimates, Vard could face another round of writedowns.

Vard is diversifying its product offerings. We saw a brochure for its Vard 8-Series line of fisheries and aquaculture-vessels.
We believe it ought to eventually take on hull jobs for parent Fincantieri’s (FCT IM, NR) booming cruise-liner business. Exposure to Brazil is under review and we see a possibility of a partial sale of this business.

The fishing vessels would certainly not make up for the weakness in its core offshore business.
Nevertheless, we see a potential white knight to Vard’s yard underutilisation problem in Europe if parent Fincantieri can subcontract out larger parts, or even whole hull jobs of its cruise-liner orderbook to Vard.
Our SGD0.29 TP is based on 0.55x FY15F P/BV.

Lee Yue Jer CFA RHB Research | http://www.rhbinvest.com.sg/ 2015-11-12

RHB Research SGX Stock Analyst Report SELL MAINTAIN SELL 0.29 Down 0.32