Vard Holdings (VARD SP) - DBS Research 2017-11-14: No Visibility Yet On Earnings Turnaround

Vard Holdings (VARD SP) - DBS Vickers 2017-11-14: No Visibility Yet On Earnings Turnaround VARD HOLDINGS LIMITED MS7.SI

Vard Holdings (VARD SP) - No Visibility Yet On Earnings Turnaround

  • Inline results; 3Q17 losses fall q-o-q to NOK9m, driven by forex gains, but EBITDA margin stays subdued at 2.7%.
  • Further deferments of delivery dates for offshore vessel portfolio in orderbook is a concern.
  • Parent Fincantieri launches another privatisation attempt to acquire remaining shares at S$0.25 per share.
  • Maintain HOLD with adjusted TP of S$0.25.

What’s New 

Vard announced today that its parent company Fincantieri has proposed another offer to privatise the company.

  • Fincantieri Oil & Gas S.p.A has announced a proposed voluntary delisting via an Exit Offer to acquire all of the remaining shares in Vard for S$0.25 in cash per share – same as the last closing price as of last Friday, and a (- 0.9%)/2.5%/3.6% (discount)/premium to the 1/3/6-month VWAP respectively. 
  • The Exit Offer price of S$0.25 translates to a 0.78x P/BV multiple, or 0.99x P/NTA. 
  • The delisting is not conditional upon a minimum number of acceptances received under the Exit Offer.

Delisting approval required. 

  • The Board of Directors of Vard has considered the Delisting Proposal and resolved to make an application to the SGX-ST for approval of the Delisting and to convene an extraordinary general meeting (“EGM”) in due course to seek shareholder approval in respect of the resolution for the Delisting (the “Delisting Resolution”). Thus, the delisting will be conditional upon:
    1. the SGX-ST agreeing to Vard’s application to delist, and
    2. the Delisting Resolution being approved at the EGM by a majority of at least 75%, and not being voted against by 10% or more of the total number of Vard shares held by shareholders present and voting.
  • As of today, Fincantieri holds 79.34% of the outstanding shares in Vard. Delisting will proceed as long as not more than 10% of total shareholders vote against it in the EGM (approximately half the minority shareholders at this point of time). If Fincantieri crosses the 90% ownership threshold during the Exit Offer, it can compulsorily acquire all the remaining shares. Otherwise, it may not own all the outstanding shares even after the listco is successfully delisted from the SGX.
  • To recap, it has been a year since Fincantieri’s last offer to privatise Vard at S$0.24 per share. Through that Voluntary Offer (as against the Voluntary Delisting via Exit Offer this time around) made in November 2016, Fincantieri increased its shareholding from 55.63% to 74.45%. However, compulsory acquisition threshold was not breached and hence de-listing was not triggered then.
  • Fincantieri has since continued to acquire Vard shares in the open market to reach today’s shareholding level of 79.34%.
  • The exact timeline is not firm yet, but the minimum offer period will be either 14 or 21 days, depending on the date on which the documents are despatched. Unlike the last voluntary offer however, when Fincantieri extended the offer period multiple times, there is no flexibility to revise the offer price or offer period in a voluntary delisting scenario.

Our views are mixed at this point of time. 

  • While the offer price looks fair to us, given it is almost the same as our target price for Vard, it remains to be seen whether those shareholders who did not tender in the earlier round will agree to the delisting and Exit Offer this time around, given the pricing is about the same. However, it must be noted that Vard’s share price has not moved significantly since the close of the last offer, despite improvement in oil price, as its earnings are still in the red, and outlook for order wins is not that rosy either. 
  • The shares have been quite illiquid as well, with only 175,437 shares on average being traded on days with trading activity over the last six months, representing just 0.07% of the total free float. Thus, this might create an incentive for shareholders to accept the offer this time. 
  • Dormant shareholders may increase the chances of the delisting resolution being successfully carried out at the EGM, whereupon dissenting shareholders may not want to hold on to shares in a private company.

3Q17 Results Highlights: Lower losses q-o-q on favourable forex movements. 

  • Vard reported 3Q17 headline net loss of NOK9m, which represents an improvement compared to the last five quarters of losses, but this includes foreign exchange gain of NOK56m, without which core losses would have been largely in line. 
  • EBITDA margin came in at 2.7%, which is about the same as 2Q17, hence there is no sign of any concrete turnaround yet. Revenue of NOK2.0bn for 3Q17 was down 6% q-o-q, and along expected lines, as new order wins and deliveries have remained subdued this year.

In the running for Norway Coast Guard contracts. 

  • Vard recently announced that it has been selected by the Norwegian government to continue talks for the construction of three new vessels for the Norwegian Coast Guard. The Norwegian Government had originally announced plans for the construction of three new Coast Guard vessels in September 2016. 
  • Following review of offers from three competing yards, which we believe include local competitors Kleven and Westcon Yards, Vard’s Langsten yard in Norway has now been selected to continue negotiations with the Coast Guard. If these negotiations are successful, the project shall be tabled for approval by the Norwegian Parliament in 2018, and delivery of the first vessel would be in 2022.
  • While details on contract value are not available, we estimate it could be in excess of NOK600m, given that these vessels are being built to replace the service’s ageing Nordkapp-class offshore patrol vessels built in the 1980s, which were upgraded for around NOK200m a few years back.

Order wins continue to be driven by non-offshore projects.

  • While there have been no orders from the legacy offshore segment despite improvement in oil price scenario in 2017, Vard’s diversification strategy has continued to pay off reasonably YTD in 2017. 
  • We estimate that Vard has secured close to NOK4.5bn worth of orders so far in 2017, including a recent contract to build one expedition cruise vessel for Coral Expeditions of Australia – another new market – and a fisheries service vessel. 
  • Including the possibility of conversion of the above Coast Guard contracts, Vard is not tracking too far from our full-year order win assumption of NOK6bn. However, this run rate is insufficient to offset revenue recognition. As a result, orderbook at the end of 3Q17 stood at NOK 12.0bn, down from NOK12.9bn at end-2Q17, and implies roughly 1.5x book-to-bill ratio.

Deliveries of offshore portfolio continue to be pushed back. 

  • Apart from slow order wins, another key risk for Vard is the delivery of existing offshore vessel portfolio on its orderbook. Of the 41 vessels on its orderbook, nine are offshore related – three PSVs and six OSCVs. The delivery dates of five of these vessels have been further extended from 2017 to 2018, as customers push back delivery in order to avoid the ongoing glut in offshore service vessels.
  • Deferment and cancellation risks are thus still pertinent for Vard and could affect 2018 earnings.

Maintain HOLD as above-peer valuation level already factors in Vard’s diversification efforts. 

  • Our TP is revised slightly upwards to S$0.25 (from S$0.24 earlier) to account for a stronger NOK. 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.
  • 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 YTD-FY17 have been from non-offshore sources, but while the orderbook has recovered from the lows in 2015, earnings have not shown a similar trajectory as core losses continue at expected levels in 3Q17. 
  • We believe the positive factors for Vard are already well accounted for in its current valuation at ~0.8x P/BV, and upside is limited.

Potential catalysts: 

  • We think Vard will need to show that it can revert to profitability in order for the share price to rerate 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.

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | 2017-11-14
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.25 Up 0.240