• Expect 2H to be stronger than 1H
• Higher costs due to Promar yard ramp-up
• Positive on high-end OSCV and subsea segments

2Q14 results within our expectations

Vard Holdings Limited’s (VARD) 2Q14 results came in within our expectations. Revenue was flat on a YoY basis at NOK2.9b. However, EBITDA surged 56.2% YoY to NOK189m, and bottom-line reversed from a net loss of NOK20m in 2Q13 to a PATMI of NOK140m in 2Q14. We believe this was due to a higher gross margin, coupled with an impairment charge of NOK70m in 2Q13 for one of its Brazilian yards. Sequentially, revenue and PATMI increased by 10.1% and 52.2%, respectively. For 1H14, revenue declined slightly by 1.4% to NOK5.6b, while PATMI jumped 38.1% to NOK232m. This formed 44.5% and 43.2% of our FY14 forecasts, respectively. We expect 2H to come in stronger than its 1H performance. VARD clinched NOK2.7b worth of new orders in 2Q14, and ended the quarter with an order book of NOK21.6b, which would provide visibility to its revenue streams.

Focus now turns to Promar yard rampup

During the analyst conference call, management confirmed that there were no further provisions made for its Niteroi yard in Brazil. We believe operations have stabilised there and the yard is operating at a breakeven level. On the other hand, its Promar yard in Brazil continued to ramp-up its operations with the addition of new headcount, many of whom are still in training and hence not at optimal productivity levels yet. Moreover, throughput and productivity development were also stifled by adverse weather conditions and country-wide protests in Brazil, leading to additional costs being incurred. This was the reason why 2Q14 EBITDA margin was flat at 6.4% on a QoQ basis. Management’s goal is to bring its Brazil yards to profitability by end 2015.

Maintain HOLD

Looking ahead, VARD cautioned that there is pressure on the North Sea OSV day rates, but remains positive on the demand for highly-specialised OSCVs and subsea support vessels. We retain our forecasts, HOLD rating and S$1.12 fair value estimate on VARD, which is pegged to 10x blended FY14/15F EPS.

Source: OCBC Research - 23 Jul 2014