Closing at $1.115 yesterday (3 June), VARD is now trading 9.3% above its 50-day moving average price of $1.02.
 
Macquarie Equities Research (MER) has issued a report on VARD yesterday, raising their 12-month target price by 15% to $1.45 based on a Discounted Cash Flow methodology. Here are some excerpts from the report.
 
VARD is up 36% YTD (vs 4% for FSSTI), as the company redeems itself from the Brazil setback and owner swap in 2013. Led by a new and synergistic owner, VARD has made all the right moves in the past 15 months, in MER’s view.
 
MER include VARD in their Asia Marquee Buy list as they see another 34% return possible over the next 12 months. MER has raised their TP from S$1.25 to S$1.45, which still implies a moderate P/E of 10x and P/B of 1.8x on 2015E.

Impact

• Redemption 1: Reviving Brazil business: New mgt’s focus is paying off as 3 out of the 5 loss-making vessels in the old yard have been delivered. Focus has turned to new yard, which has just started, and has 10 orders until 2016.
• Redemption 2: Winning large orders to ensure 100% capacity use: VARD has won an unprecedented NOK23bn of orders since Jan ‘13 (NOK8.9bn in 2014 YTD), leading to a peak order book of NOK27bn. Importantly, 25/27 vessels won would be built in key yards in Romania, Norway and Vietnam.
• Redemption 3: Synergising with new owner to expand and grow: The new owner has helped VARD expand its reach to North America and yard capacity in Romania and Vietnam. It has also helped VARD add new clients.

Redemption impact – back to the heydays:

• Revenue inflection in 2015: Peak order book of NOK27bn ensures revenues jumping to ~NOK14-15bn from ~NOK12bn run-rate, in MER’s view.
• Margin recovery from 2014: MER estimates EBITDA margins to improve from 6.2% in 2013 to 9.7% by 2016E.
• Revenue inflection + margin recovery = robust profit growth: MER estimates 45% profit growth in 2015E on top of 54% profit growth in 2014E.

Earnings and target price revision

• Increasing target price by 15% to S$1.45 (DCF valuation moved to 2015E).

Action and recommendation

• Catalysts – Plenty to keep the momentum going:
• New orders: The stock has started moving with new orders. MER is calling for a record 2014 with NOK15bn of new orders.
• Earnings upgrades: MER’s 2015 profit estimate is 8% above consensus. MER believes street is underestimating potential revenue inflection in 2015.
• Resumption of dividend payouts: 30% min payouts will start from 2014.
• Focus moves to 2015E valuations: Stock is at 1.3x P/B despite ROEs improving to 18% levels in 2015E. EV / order book is at only 0.4x.

Source: Macquarie Research - 4 Jun 2014