Vard warns of weaker 2Q13. Vard issued a profit warning stating that it expects 2Q13 net profit to be lower than current consensus market estimates. Further delays and cost overrun at the Niteroi yard in Brazil resulted in additional cost in outsourcing. Estimated start-up costs at the new Promar shipyard has also been revised higher. Vard would make further disclosures when it reports 2Q13 results on 11 July 2013.

EBITDA margins could end the year in the single digit territory. There are 4 remaining vessels to be delivered from the Niteroi yard between 3Q13 and 3Q14. Given the more sanguine mood expressed regarding the intensity of the problems and ongoing efforts to contain the Niteroi yard issues during the last quarter, this profit warning came as a bit of a surprise to us. While our FY13F forecast is lower than consensus, our initial assessment after our call with management is that FY13F net profit could be even lower than our expectations. We estimate that 2Q13 EBITDA margins may come down to about 5-6% (11.1% in 1Q13) while FY13F EBITDA margins would decline to 9.4%.

Look beyond FY13F. Our view has been to look beyond FY13F for the recovery growth in FY14F, which would be driven by higher-thanexpected order intake in 2H13. When quizzed on the order win outlook, Vard remains optimistic and hinted that there are chances of exceeding the NOK12b order intake expectation for FY13F. YTD order wins is about NOK3.7b. We believe that the surprise upside could come from the highly anticipated 7 PLSV orders from Petrobras, in which 3 was recently awarded to the Seadrill-SapuraKencana JV.

Brace for roller coaster ride, but maintain Buy. This would no doubt result in a knee jerk negative share price reaction as we expect consensus to cut earnings and TPs. We cut our FY13F/14F/15F net profit forecasts by 19%/5%/3%. Brace for a roller coaster ride in share price in the short-term, but we remain firm in our view that (1) betterthan-expect order wins will drive FY14F recovery and (2) valuations at current levels is still unjustifiably low after our earnings cut. TP consequently reduced to SGD1.52, still pegged to 9x PER on average FY13-15F earnings.

Source: Maybank Kim Eng Research - 1 Jul 2013