Below expectations, downgrade to Hold, TP SGD0.95. Vard’s 2Q13 results were lower than our adjusted expectations following the company’s profit guidance on 28 June 13. 2Q13 revenue came in at NOK2.9b (-1% YoY, +7% QoQ) with a net loss of NOK20m (-118% YoY, -111% QoQ). 1H13 PATMI makes up only 25% of our previous FY13F forecast. If the goodwill impairment of NOK70m is excluded, the company would have been profitable. FY13F will be a writeoff year and we think that Vard is taking this chance to kitchen sink all the negatives to position for a better FY14F recovery. Despite stock trading at only 5.7x/4.9x FY14F/15F PERs after our earnings cut, negative sentiments will weigh down on the stock. Downgrade to Hold, with TP of SGD0.95, pegged to 1.4x fwd P/B, which is -2 std dev below mean.

Has provided for losses, but Brazil profitability remains low. EBITDA margin for 2Q13 dipped to 4.1% (1Q13: 11.1%, 2Q12: 13.8%). The key reason was attributed to cost overrun for the outsourced hull construction work for Brazil yard projects. The last outsourced hull has since been delivered. Vard commented that it has used its best judgement to provide for all the potential losses for these projects in 2Q13, but also qualifies that it cannot guarantee that no other unforeseen losses may arise. We expect profitability for outstanding projects at Niteroi yard to remain low. Our FY13F EBITDA margin assumption is lowered to 7.8% (from 9.4%) resulting in a further 29% cut in our FY13F net profit forecast.

Vard remains optimistic on contract wins. Vard remains positive on securing more contracts in 2H13. YTD contract win stood at NOK4.0b. We think that a batch of PLSV awards could be imminent after Petrobras handed a total of 6 such orders to Seadrill-SapuraKencana JV and Subsea 7. We estimate that potential contract value to Vard could be worth about NOK6b.

Await contract win catalysts. We cut FY13F/14F/15F earnings by 29%/16%/12%. Expect more consensus earnings cuts which would weigh down on share price. We downgrade to hold with TP lowered to SGD0.95 as we await contract win catalysts to rerate the stock. No change in dividend policy of minimum 30% payout but no interim dividend was declared this quarter.

Source: Maybank Kim Eng Research - 12 Jul 2013