• 1Q14 PATMI slips 51.1% YoY
• Brazil operations improving
• Strong orders intake

1Q14 results below expectations, but not as bad as it seems

Vard Holdings Limited’s (VARD) 1Q14 revenue declined slightly by 2.7% YoY to NOK2.67b, meeting 21.3% of our FY14 forecast. PATMI slumped 51.1% YoY to NOK92m, forming just 15.5% of our full-year estimate. Although we expect a much stronger 2H, this set of earnings still came in below our expectations. This was driven largely by higher depreciation expenses and staff costs due to headcount increase at its new Promar yard (number of employees rose from 190 in 1Q13 to 1,210 in 1Q14). On a positive note, VARD recorded a third consecutive quarter of EBITDA margin improvement QoQ (1Q14: 6.4%). Its PBT was also 36.8% higher on a QoQ basis. While we continue to expect FY14 to be a year of recovery for VARD, we see the need to pare our FY14 and FY15 PATMI projections by 10.1% and 2.2%, respectively.

No provisions for contract losses made in 1Q14

VARD has continued to work through its issues in Brazil, and we believe it now has better control over the situation. Encouragingly, management highlighted that no provisions for contract losses were made in 1Q14. While Promar continued to incur start-up losses, operations are in the process of being ramped up and completion of the yard will happen in Jul 2014.

Maintain HOLD

Another positive trend was VARD’s significant orders intake of NOK5.53b (eight vessels) in 1Q14, which boosted its order book value to NOK21.84b, as at 31 Mar 2014. Management did, however, caution that this round of order wins should be considered as exceptional. Still, we believe the worst is over for VARD. Given a positive industry outlook created by increasing demand in Arctic regions and the subsea support and construction vessel segment, we believe VARD’s recent strong order wins reflect its solid core competencies within the high-end support vessels segment. Hence we believe it deserves a higher target PER peg of 9x (previously ascribed a conservative 8x peg). Applying this to our revised blended FY14/15F EPS forecast, we derive a new fair value estimate of S$0.97 (previously S$0.84). But we maintain our HOLD rating given the limited upside potential.

Source: OCBC Research - 30 Apr 2014