Fincantieri launches privatisation offer for Vard - DBS Research 2016-11-14: S$0.24 cash offer is reasonable ~ accept the offer

VARD HOLDINGS LIMITED MS7.SI

Fincantieri launches privatisation offer for Vard - S$0.24 cash offer is reasonable - accept the offer

Offer price is c.33% higher than our last target price of S$0.18.
Offer seems attractive, given that Vard’s near to medium term fundamentals will be clouded by weak order win outlook in OSV segment.
Offer is conditional upon 90% ownership level; Fincantieri’s intention is to de-list Vard.
Two other potential privatization candidates are POSH and Mermaid.

Fincantieri S.p.A., which currently holds a majority stake of 55.63% in Vard, has announced a Voluntary Conditional Cash Offer for the remaining shares in the company at an offer price of S$0.24 in cash, representing a c.33% premium to our last target price of S$0.18; an 11.63% premium over the one-month volume- weighted average price (VWAP); though only a 4.35% (1Sct) premium to last Friday’s closing price of S$0.23 as the share price had run-up in the week prior to this announcement.
The offer is conditional upon Fincantieri having received sufficient acceptances that result in it holding more than 90% of Vard’s total shareholdings at the close of the offer.
Fincantieri’s intention is to de-list Vard from the SGX if the offer is successful. The official offer document will be dispatched to Shareholders between 14 to 21 days from the 14th of November (announcement date), and the offer will remain open for a period of at least 28 days from the posting of the offer document.

Our report issued on 22 July 2016 (“Dissecting the business plan”) details our view that Vard’s order wins from its new target segments (exploration cruise vessels, acquaculture vessels, patrol vessels, offshore wind service vessels, hull sections etc.) are unlikely to make up for the demand shortfall from the OSV newbuilding market, going forward.
Vard’s order wins year- to-date (YTD) totalling ~NOK10.1bn look impressive at first glance, but we are cognizant of the fact that over 60% of this is derived from six expedition cruise vessels –which is a niche market, where newbuild demand may not be sustainable. Thus order win momentum from this segment is unlikely to repeat in FY17/18. Stripping out this, order intake YTD stands at c.NOK3.9bn – higher than the NOK3.5bn recorded in FY15 but well below historical levels of NOK9-14bn annually, as Vard’s traditional bread and butter OSV newbuild market remains moribund with the fall in oil prices.
Other new target segments have yet to show significant momentum, thus engendering a lacklustre order win outlook, which offers limited revenue and earnings visibility past FY18 as the current orderbook is depleted.

The offer price represents a historical P/BV multiple of 0.68x, or 0.83x P/NTA – offering a significant premium to OSV shipbuilder peer valuations (see table on next page).
Arguably, Vard fundamentally deserves a premium versus these peers given that its diversification strategy has borne some fruit in the form of visibility on the next 1-2 years’ revenues due to exploration cruise vessel and module carrier vessel order wins. However, even factoring this in with a 0.4x P/NTA peg (as we have done, yielding our most recent TP of S$0.18), the offer remains attractive, at a c.33% premium to our TP. Thus we advise shareholders to accept the offer, as any sharp oil price recovery driving share price momentum looks unlikely in the foreseeable future, as does the possibility of a competing offer given that Fincantieri has partly consolidated Vard’s operations and the synergies that it will be able to generate after full consolidation and operational flexibility will be difficult to match.

This move was not completely unexpected as we had previously highlighted privatization by Fincantieri as a potential upside risk to our recommendation on Vard. Two other possible privatization candidates, which we think fit the bill are:
1. Mermaid Maritime (MMT SP Equity): Mermaid is c.87.3% held by the Thoresen group and its related management, leaving only S$36.6m in free-float market capitalization on the table. With c.S$250m in cash on hand, the Thoresen group has the necessary ammunition to take Mermaid private. Additionally, Mermaid has very low debt levels versus peers, with a net gearing of only 0.04x as of 2Q16, this adds to its attractiveness as a privatization candidate.
2. Pacc Offshore (POSH SP Equity): POSH is 81.89%-owned by the Kuok group, and is a more stable long-term bet versus peers with no immediate debt concerns (as committed undrawn bank lines cover capex requirements) and positive operating cash flows YTD. The company has also demonstrated an ability to secure work for its vessels amidst an anaemic market (e.g. long- term contracts recently inked for work in the Middle- East for 13 vessels).

Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-14

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