Before market hours yesterday, VARD reported a strong improvement in earnings before interest, tax, depreciation and amortization (EBITDA) margin to 6.4% in 1Q14, up from 5.1% last quarter and 4.1% in 2Q13, indicating that the Brazil losses are subsiding every quarter. This has been the biggest concern for investors. Macquarie Equities Research (MER) released a research report shortly after and some excerpts are shown below.
 
1Q14 profit came in at NOK92m, in line with estimates, as MER expects most of its NOK550m profit estimate for 2014E to come in 2H14. MER is expecting NOK225m profit in 1H14 and NOK325m profit in 2H14.
 
Impact
Brazil losses are subsiding: EBITDA margin of 6.4% indicates that the Brazil losses have subsided further. MER is estimating NOK300m of Brazil losses in 2014E, out of which a NOK200m loss should come in 1H14.
 
Brazil “thorn in the flesh” vessels are being delivered on schedule: Out of the four pending vessels from the old Niteroi yard, one was delivered on 8^th April, while the second is on track to be delivered in May. VARD will be left with only two vessels after May 2014, which are also on track to be delivered in 3Q14 and 1Q15.
 
New yard in Brazil – Promar – in final stages: With 1,210 employees at the yard, VARD Promar is set to start full operations. The first vessel order from Transpetro is under construction and on track to be delivered in 3Q14.
 
An all-time record “order inflows” in 1Q14 has built a large order book for VARD: VARD won NOK5.5bn of new orders in 1Q14, thus taking its order book to an all-time peak of NOK22bn. This order book will result in a substantial 20% revenue jump in 2015E, in MER’s view.
 
All yards running 100% utilization while capacity is being expanded:  All the yards in Romania, Norway and Vietnam are now running full capacity. Given the increasing cash flows (net cash position of NOK1.14bn vs NOK767mn in 4Q13), VARD is now investing in increasing productivity at the yards so as to be able to generate higher revenues.
 
Price catalyst
12-month price target: S$1.25 based on a DCF methodology.
 
Catalyst: New orders
 
MER’s action and recommendation
54% profit growth in 2014E; at 7x 2015 P/E and 1.2x P/B, stock’s a value buy: The gradual decline of Brazil losses and better utilization of the other yards indicate that revenues and margins are set to improve quarter after quarter for VARD. The strong turnaround story in 2014 and 2015 is very much on track and the stock is a value buy at current valuations, in MER’s view.

Source: Macquarie Research - 30 Apr 2014