Yesterday, Vard Holdings was one of the biggest gainers amongst mid-cap stocks with a 6.97% spike to $1.075, on the back of a contract win worth around NOK 1.1 billion. Macquarie Equities Research (MER) issued a research report on Monday morning following the news with a view that the stock is now a very attractive buy with a forecast 16% return over the next 6 months. Here are some excerpts from the report…

Vard secured another large and high quality order worth around NOK1.1bn. With this order, Vard’s order book has touched a record of around NOK 24bn, hence further securing its ‘back to heyday’ profit level of around NOK800m by 2015E.
 
Impact
Another high-quality, large order: The order from one of the world’s top 5 contractors, Island Offshore, is for a very large and specialized vessel worth around NOK1.1bn. Island Offshore had placed a similar order last year too.
 
Vard’s key yards in Norway and Romania are now full until the first half of 2016 (1H16): With utilization being a key driver of ‘Earnings Before Interest and Tax (EBIT) margins’, Vard now has its key yards running at 100% capacity. Even the Vietnam yard is running full capacity until 2016. Vard will now start booking orders for 2H16.
 
Order book at all time peak: Vard now has around NOK 24bn of orders, securing around 2 years of revenue. More importantly, 80% of these orders are in high margin yards in Norway, Romania and Vietnam.
 
2015 revenue inflection confirmed: MER has been reiterating that due to this big jump in order book over last 12 to 18 months, Vard will see a big inflection point in 2015 in its revenues. From a stable level of around NOK 12bn of revenue annually from 2008 to 2014, Vard’s revenue will jump to NOK14 to 15bn in 2015E. These large orders confirm MER’s thesis.
 
With further margin recovery, it will all flow down to profits: With Brazil issues being phased out and high quality orders translating into revenues elsewhere, MER expects a strong 45% profit growth in 2015E, on top of the 54% profit growth in 2014E.
 
Action and recommendation
Another 25% return (based on the $1.01 share price of Vard in the research report): possible over the next 6 months The stock has delivered strong returns this year and MER expects the re-rating to continue. With an additional 3% dividend yield on offer for 2014, Vard offers a robust return over the next 6 months, in MER’s view.
 
At 7x 2015E P/E and with 2015 profit almost confirmed, MER believes the stock is a very attractive buy: With profit likely returning to the ‘heyday’ by 2015E, the stock seems to offer a very attractive risk-reward proposition.
 
At 1.1x P/B and with ROEs improving to 18% levels, there is a valuation gap: MER expects price-to-book levels to return to 1.5 to 2.0x levels over next 12 to 18 months.
 
MER has has an Outperform rating on Vard Holdings with a 12-month target price of S$1.25. MER believes the stock price catalyst will come from new orders.
 

Source: Macquarie Research - 27 May 2014