Vard Holdings - DBS Research 2016-07-22: Dissecting the business plan

Vard Holdings - DBS Research 2016-07-22: Dissecting the business plan VARD HOLDINGS LIMITED MS7.SI 

Vard Holdings - Dissecting the business plan

  • YTD 2016 contract wins stronger than expected on the back of exploration cruise vessel boom.
  • But new target markets could prove insufficient in size to offset the dip in offshore vessel orders.
  • Maintain HOLD with adjusted TP of S$0.18.

Our market sizing estimates indicate 

  • Vard’s new business plan is unlikely to catalyse a recovery to pre-2015 levels. 
  • Comparing the addressable market for offshore vessels from 2010-2014 against the 5-year forward market size of Vard’s five new target segments, we find that the new markets, at around US$11.4bn in value, are only 14% the size of what the offshore vessel market used to be. Thus, while YTD 2016 orders of ~NOK9.1bn (including LOIs) seem large compared to 2015’s NOK3.5bn in order wins, we believe this momentum is unlikely to be sustained and that Vard’s plan to hit NOK12-13bn in revenues by 2020 is a stretch given the limited market size of the new segments and the dearth of offshore newbuilding. 
  • We are forecasting NOK6bn in order wins per year going forward, compared to the average of NOK11.3bn during the peak years of 2010-2014.

2Q16 profits in the red again. 

  • Vard reported NOK53m of losses in 2Q16, versus profits of NOK37m in 1Q16. 
  • Revenues were up 9% q-o-q, but EBITDA margins fell from 2.8% in 1Q16 to 0.5% in 2Q16 on the back of higher materials and subcontracting costs, restructuring costs related to the shutdown of the Niteroi yard in Brazil as well as higher provisions for bad debt. 
  • Given that costs remain stubbornly high and orderbook is difficult to sustain, we are forecasting losses of NOK122m/ 65m in FY16/FY17.

Maintain HOLD with TP of S$0.18. 

  • Vard is trading in line with its peer average of 0.32x, but we think it deserves a slight premium, similar to Triyards, which has diversified and is trading at ~0.4x. 
  • We maintain our peg of 0.4x FY16 P/BV, with a revised TP of S$0.18, reflecting changes in book value and exchange rates.

Key Risks

  • Order cancellations remain the key risk; offshore support vessels (OSVs) account for half of Vard’s orderbook in terms of numbers. 
  • Lower-for-longer oil price is another key macro risks.

Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-07-22
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.180 Down 0.187