VARD rallied another 0.9% yesterday, outperforming the STI. The 0.9% gain came right after a 5.7% increase on Wednesday. The stock’s stellar performance came on the back of VARD’s earnings result which was announced after market on Tuesday. On the same day, Macquarie Equities Research (MER) released a research report with a ‘Outperform’ recommendation and a 12-month price target of $1.82. Some excerpts from the research report are shown below.

VARD’s 1Q13 profit of NOK188mn (-30% YoY) came in 5% below MER’s estimates due to slightly lower revenue booking on some vessels. More importantly, the value of new orders disclosed in the call surprised one and all, as the street had ignored the large and complex nature of new vessels.

The Good:
New orders secured have much higher value than estimated: VARD disclosed that the value of the 3 new vessels secured in 1Q13 is NOK2.8bn. If MER adds the other 3 orders that VARD has won in April and May ’13, the value of the 6 new orders goes up to ~NOK5bn, much higher than what MER had expected.

Solid order book of NOK15.5bn and 46 vessels: Order book is ~NOK17bn including 3 vessels in April and May, providing profit visibility of 1.5-2 years.

Main yards in Norway and Romania running 100% utilization: Given the large orders this quarter, the brief period of under-utilization in 4Q12 is over.

New investments in Romania and Vietnam to increase capacity: The new management is already in full gear with yards being enhanced to be able to take larger and more complex vessels.

2nd Brazil yard on track to commence operations by June 2013: The yard is 85% complete and ready to execute and target orders from Petrobras.

The Bad:
EBITDA margin of 11.1%, as expected: Margin came in at the mid point of the company’s long term guidance of 10-12%. With the Brazil yard issues expected to come under control by 2H13, MER thinks margins will improve.

Looking forward:
45% of MER’s and street’s order inflow estimate already achieved; VARD set to surprise: Large Petrobras orders are on the horizon. In addition, the anchor handling tug supply vessel market is picking up. MER thinks that the street will have to gradually upgrade its order inflow numbers, which will lead to higher margin and profit estimates.

Action and recommendation
Order inflow strength and positive impact from new owner being ignored; Stock set for re-rating: The new management seems to be completely focused on helping VARD grow through new orders, new customers and expanded capacity. MER believes there is unjustifiable negativity built around the stock leading to extremely cheap valuations of 6x 2014E price to earnings.

Source: Macquarie Research - 17 May 2013