Vard Holdings - DBS Research 2016-05-13: Diversification plan shows promise

Vard Holdings - DBS Research 2016-05-13: Diversification plan shows promise VARD HOLDINGS LIMITED MS7.SI 

Vard Holdings - Diversification plan shows promise

  • US$300m order win for 15 Module Carrier Vessels announced
  • 1Q16 core loss of NOK31m; better than expected
  • Upgrading to HOLD on diverse order wins



Upgrade to HOLD as diversification plans provides some solidity. 

  • Vard has seen reasonable success so far in its business plan of entering new, non-oil & gas-related markets. 
  • Contract wins YTD for a stern trawler, 15 module carrier vessels, hull construction work for parent Fincantieri, and the entry into an LOI with Ponant for four expedition cruise vessels amount to a substantial NOK6.2bn (including the LOI vessels), which far surpasses FY15’s total order wins of NOK3.5bn. 
  • We now estimate that Vard can achieve minor profitability by FY17, compared to our earlier estimates of losses, owing to the higher volume of new work secured. 
  • Our P/BV valuation peg is increased to 0.4x, reflecting the stronger outlook, raising our TP to S$0.19.


1Q16 results beat expectations, but still a core loss. 

  • Vard reported a core net loss of NOK31m for the quarter (after excluding a NOK68m exchange gain), better than our estimates. 
  • Lower materials costs (likely reflecting a lagged effect of last year’s drop in steel prices) and lower subcontracting costs helped boost EBITDA margin to 2.8% in 1Q16; though we think costs could edge up again in 2Q/3Q.


Execution risk remains salient. 

  • The yards at Brazil continue to perform below expectations, weighing on the Group’s performance. 
  • The influx of new vessel types to be built also poses execution risk, but if Vard shows that it can perform well on these contracts, the stock may see some upside.


Valuation:

  • We upgrade the stock from FULLY VALUED to HOLD, with target price of S$0.19, raising our P/BV peg from 0.3x to 0.4x.


Key Risks to Our View:

  • Faster-than-expected order wins from the new target markets described above or a turnaround in Brazilian operations could pose upside risk to our call. 
  • Execution issues on new vessel types and order cancellations present downside risks.





Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-05-13
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 0.187 Up 0.13


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