Strength of recovery disappointed. While 3Q13 returned to profitability with PATMI of NOK76m, following a net loss of NOK20m in 2Q13, 3Q13 EBITDA margin of 4.4% (2Q13:4.1%, 3Q12:13.5%) was lower than our expected 7-8% level. This was due to unresolved work overload situation in its Niteroi yard in Brazil, resulting in further delays and cost overruns. Nevertheless, we believe that margin may have bottomed out. FY13 would nonetheless be a write-off year as we look to FY14-15 for an earnings recovery following the strong order win momentum.

Loss provisions sufficiently taken at Niteroi, margin recovery from FY14. With loss provisions likely to be sufficiently taken and outstanding works (small unrecognized revenue of NOK0.5b) at Niteroi yard to be booked at zero margins, the drag on future profitability is likely to be manageable. On this basis, we expect the overall margin to recover in FY14. That said, the recovery could be held back by the initial start-up costs at the new Promar yard.

Maintaining strong optimism on order intake. On a positive note, strong YTD order win of ~NOK12b has lifted outstanding order book to a record high since 2009, at NOK19.6b. Vard is optimistic on order win outlook for the rest of FY13 and FY14, on the back of robust market demand for subsea support and construction vessels. It also sees opportunities for high value contracts that are more than NOK1b. This explains our expectation of a strong earnings recovery in FY14-15.

Maintain Buy, TP lowered to SGD1.04. We cut FY13 earnings by 20% on account of weak 3Q13. FY14-15 forecasts are also lowered by 3-5% as we factor in more conservative margins. Our TP of SGD1.04 is pegged to peer 8x PER on average FY13-15 earnings. At current share price, Vard is attractively priced at 6.3x FY14 EPS. We think the worst is over and maintain our Buy call.  

Source: Maybank Kim Eng Research - 7 Nov 2013