Leading customers expressed confidence in long term OSV demand. Despite recent Brazilian yard woes, Vard has maintained an unwavering confidence in order win outlook. In their latest quarterly results updates, leading OSV owners who are key clients of Vard have expressed high levels of optimism in long-term OSV demand. Vard’s 2013 order wins have reached our initial expectations and we believe that further order wins would set the stage for a positive re-rating. In our opinion, current share price has more than priced in the execution issues in its Brazil yards. We upgrade the stock to a Buy with TP of SGD1.12 pegged to 8x PER on average FY13-15F earnings (previously SGD0.95, based on 1.4x P/B).

Take opportunity of market skepticism. We think that market remains cautious about Vard’s execution in Brazil after the 2Q13 results disappointment. Recent contract win momentum has failed to invoke a sustained lift to stock price. However, YTD contract win of about NOK11.5b has already matched our initial forecast. With about 3 months to go before the year ends, it would not be difficult to breach Vard’s NOK12b order win expectations, which we believe would trigger the start of a re-rating. We raise our FY13F order win assumption to NOK13.4b (from NOK11.5b).

Changes to forecasts. Based on our revised revenue recognition schedule, FY15F revenue forecast is now higher as we estimate that the Technip-DOF would contribute substantially to FY15F revenue. We have also reduced EBITDA margin assumptions by about 0.7ppt for FY14-15F to be more conservative. Our FY13F/14F/15F net profit figures now differ by -2%/-9%/+9% from our previous forecasts.

Risk-reward tradeoff compelling, Upgrade to Buy, TP SGD1.12. At current valuation levels, we believe that downside risk is limited. Vard trades at FY14F/15F PERs of 6.2x/4.4x. Forward dividend yields ranged between 4-7% with attractive ROEs. Our scenario analysis suggests a bull/bear case TP of SGD1.48/0.80, which makes a compelling investment case based on risk-reward tradeoff. We upgrade the stock to Buy with TP raised to SGD1.12 based on our base case scenario.

Source: Maybank Kim Eng Research - 5 Sep 2013