NDR with Vard. We hosted a NDR for Vard in Singapore last week, meeting both institutional and retail clients. Investors zoomed in on 3 key concerns: (1) margin expectations, (2) order win prospects and (3) Vard’s direction after the change in ownership. Responses were mixed depending on each investor’s initial expectations relative to the outlook painted. Key takeaways below, maintain Buy, TP SGD1.66.

Undue sell-down. We believe that recent weakness in share price is partly due to consensus cutting overly optimistic FY13F numbers and valuations due to margin concerns. We had initiated coverage with the lowest FY13F earnings estimate, forecasting an 11% dip and were well aware of the risks.

Brazil yard issues a drag on group margins. In our view, the market has underestimated potential margin pressures from Brazil yard for FY13F and is now/would be realigning their forecasts. There are 4 vessels in Niteroi yard in Brazil facing delays, which would lead to additional costs. These contracts are not expected to be profitable and would bring down overall margins. We had already forecasted for a dip in margins for FY13F but we believe that with efficiency enhancements, higher utilisation and resolution of problems in Brazil yard would lead to an eventual margin recovery in FY14F.

Room for upside surprise in contract wins. However, we believe that the strength of recovery from returning orders this year could surprise positively. Vard views market expectations for new contract wins (NOK10-11b) as overly pessimistic. It is confident to bring in close to NOK12b in new orders for FY13F, but contributions from new contracts would mostly be seen in its financials from FY14F onwards. We believe that there is room for upside to order-win estimates and would keep an eye on its contract win momentum this year.

A more supportive owner. According to Vard, Fincantieri looks to be a better fit for Vard given cultural similarities and their greater enthusiasm to grow the company as compared to the previous owner. Meanwhile Vard’s management is intact and dividend policy is kept at a minimum of 30% payout (we assumed 40% in our model).

Source: Maybank Kim Eng Research - 30 Apr 2013