Vard Holdings - DBS Research 2017-07-26: Diversification Benefits Priced In

VARD HOLDINGS LIMITED MS7.SI

Vard Holdings - Diversification Benefits Priced In

Core earnings in line with our expectations.
LOI for NOK1bn exploration cruise vessel expires without a firm order materialising.
Order wins of NOK3.5bn YTD are on track to meet our assumption of NOK6.0bn for full-year 2017.

Compared to other SGX-listed OSV shipbuilders, Vard has done well in demonstrating its ability to diversify into non-offshore vessels.
The majority of order wins in FY16 and FY17-YTD have been from non-offshore sources, and the orderbook has recovered c.26% from the lows in 2015. However, we believe this positive factor is already accounted for in its current valuation at ~0.8x P/BV.

We are taking a more cautious view on Vard’s future order win outlook, as we see some of the niche markets that have driven order wins in FY16/17 (e.g. exploration cruise vessels, module carrier vessels etc.) as having lower recurring sales potential.

We think Vard will need to show that it can revert to profitability in order for the share price to re-rate further. This would only be driven by an uplift in order wins and revenue which would feed through to yard utilisation and margins.
A revenue recovery to levels of at least NOK10bn+ per year should do the trick, but we have yet to see evidence of a sustained rebound in top line to this level.

Our TP is revised slightly downwards to S$0.24 (from S$0.25 previously) to account for lower earnings and book value projection owing to the expiry of LOI for one exploration cruise vessel secured earlier in 2017.
Our TP remains pegged to a P/BV multiple of 0.8x, a premium to other OSV shipbuilders in the region, to account for Vard’s superior execution in attracting orders from non-offshore oil & gas vessel segments with support from parent Fincantieri.

Faster-than-expected order wins from Vard’s new target markets 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.

Core earnings in line with expectations.
Vard’s 2Q17 headline net loss of NOK69m was below expectations, but stripping out NOK35m of forex losses, core losses of NOK34m would have been largely in line with expectations.
Revenue of NOK2.12bn for 2Q17 was c.20% higher q-o-q, and in line with our forecast, as workload ramped up on orders secured in 2016 and YTD in 2017.
EBITDA of NOK76m was also in line and implies EBITDA margin of 2.8%, up from 2.3% in 1Q17, but still subdued as top-line growth was offset by higher wage costs.

To recap, the LOI was announced in January 2017 for a 145m-long expedition cruise vessel (a big market for Vard in the past year, having secured contracts to build six of these vessels worth over NOK6bn by our estimates) to be built at the Romanian and Norwegian yards. This was subject to ‘several conditions being met, including satisfactory financing.
Vard’s management has declined to offer any insight into the specific reasons for the LOI’s expiry, which provides no comfort – especially if the reason was financing-related.

Firm orders of c.NOK3.5bn have been secured by Vard in FY17 – on track to meet our assumption of NOK6bn for the full year, although momentum seems to have taken a step back since early May, when the last order was announced.
Orders in 2017 have been from non-oil & gas segments, which is encouraging, and comprise a NOK1.5bn contract for a research vessel, about NOK1.3bn from three fishing/aquaculture vessels of various types, and an NOK600m order for two LNG powered car and passenger ferries.

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-07-26

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.240 Down 0.250