VARD gapped down more than 6% on 6 August as the shipbuilder of offshore support vessels (OSV) took a hit from news that it may face hefty tax fines from the Brazilian government. VARD recovered the bulk of its losses over the next two weeks. However, VARD’s rebound ended earlier this week after its share price started to trade below the 50 and 100-day moving averages.
 
Closing at $1.025 yesterday, VARD has pulled back approximately 5.5% in the month of August.
 
Macquarie Equities Research (MER) issued a report on Vard Holdings on 27 August, maintaining their 12 month price target of $1.45. Here are some excerpts from the report.
 
VARD’s management presented at MER’s ASEAN Conference in Singapore.
 
Impact
Focus 1: Tax provision of NOK100-150m might be taken in 3Q14: VARD said that although they have a strong case against the Brazilian tax authorities for the NOK200m additional tax (includes penalty and interest costs of 9% over 4 years), they will take some provisions in 3Q14 itself. Although MER thinks that the actual additional tax could be much lower than the NOK200m, MER thinks VARD will provide for NOK100-150m in 3Q14. MER’s full year profit forecast for 2014 is NOK532m. MER thinks it is prudent that VARD provisions now and writes back any favourable outcome in 2015.
 
Focus 2: Progress in Brazil: Although Brazil contributes around 20% to VARD’s revenues now, it is contributing 0% to profit according to management due to ramp up costs in the new Promar yard and the phasing out of old Niteroi yard. The good news is that the staffing for the new yard is complete with VARD having hired 1,400 employees. The construction of the new yard is also progressing on track.
 
Focus 3: New order forecasts for 2H14: VARD expects 2H14 to be softer than 1H14 where it won a record NOK8.2bn of new orders. VARD expects NOK12-14bn of new orders in the full year 2014. July and August are slow months due to the summer season and VARD is in discussions for new and large OSCV orders over the next 4 months.
 
Focus 4: Order inflow outlook for 2015-16: While the new cost focus of oil companies and reduction of capex is shrinking the overall pie, VARD being a niche and not a volume player is not dependent on the overall market pie, according to management. VARD’s designs and niche products are the deciding factors for new orders which is why it seeks opportunities in customized high end categories like AHTS and PSV to be able to procure NOK12-14bn of new orders annually.
 
Focus 5: Relationship and synergies with the new parent: VARD informed that the new parent Fincantieri is more synergistic than the old parent STX Corp. However, it is not involved in day to day operations, but on a strategic level, to help VARD cross-sell products and expand geographically.
 
Price catalyst

• 12-month price target: S$1.45 based on a DCF methodology.
• Catalyst: New orders

 
Action and recommendation
Tax issue will be out of the way in 3Q14; Focus will be back on growth and orders: VARD is up 28% YTD (vs +3% for FSSTI) and has been the top performer in the Industrial space. MER believes the re-rating will continue from 4Q14 with the tax issue out of the way and new orders coming in.

Source: Macquarie Research - 29 Aug 2014