4Q13 results disappointed with further cost overruns and delays in Niteroi yard. No dividend was declared for FY13.

While Niteroi yard’s performance was a negative surprise, the strength of underlying operations looks strong.

Maintain Buy, TP of SGD1.07x based on –1SD P/BV of 1.4x.

What’s New

Vard reported 4Q13 PATMI of NOK113m (-8.9% YoY, +48.7% QoQ), even lower than our below-consensus forecast. Cost overruns and delays in its Niteroi yard in Brazil continued to plague the quarter. We are surprised by the magnitude of the loss - estimated to be at least NOK100m. EBITDA margin shrank to 5.1% vs our forecast of 7.3% where we assumed breakeven for Niteroi yard vessels. No dividend was declared for the year despite the company’s long-term policy of 30% payout.

What’s Our View

Notwithstanding management’s assurance that sufficient provisions were made, Niteroi yard continued to incur losses in 4Q13. We cut FY14E/15E EBITDA margin to 7.9%/9.8% (9.1%/10.5% previously) in order to be conservative. Unrecognised revenue at Niteroi yard is estimated to be NOK0.5-0.6b, with four more vessels yet to be delivered, the last in 1Q15.

But there are bright spots, eg, the record order intake of NOK14.2b in FY13 and strong order win momentum (NOK2.2b YTD), which would likely be buoyed by improving OSV demand. We estimate that EBITDA margin would have been at least 8.3% had Niteroi yard broken even. This demonstrates the underlying strength of its other operations. In our view, earnings have bottomed out and we forecast NOK12.8b worth of new order wins for FY14E, which should spur earnings recovery. In view of potential earnings risk from Niteroi yard, we switch to P/BV valuation methodology. Applying a 1.4x P/BV multiple (-1 SD) on FY14E BVPS yields a TP of SGD1.07 (from SGD1.04) Maintain Buy.

Source: Maybank Kim Eng Research - 26 Feb 2014