• Uncertainties over tax claims from Brazil
• Oil prices have dipped sharply
• Lower valuation peg and FV

Weak share price performance

Vard Holdings Limited’s (VARD) share price has fallen 19.0% since it announced on 5 Aug 2014 that it has received an additional tax claim of ~NOK200m (including penalties and accrued interest) from the tax authorities in Brazil. This is with regards to transfer pricing of design and equipment packages delivered from its Norwegian entities to its Brazilian yard Vard Niteroi in FY10. According to VARD, the diverging assessment originated from conflicting Brazilian transfer pricing rules, which were only aligned as from FY13. VARD will file an appeal against the ruling. It does not expect to make any payments until a final conclusion is reached, and this may take several years. However, it is evaluating the need for provisions for the aforementioned tax cost (will likely hit its FY14 financials if any provisions are made), although there would not be an immediate cash outflow. We are also concerned of the possibility that new tax claims for FY11 and FY12 may arise (but FY10 has the largest exposure).

Mixed industry data points

We believe another reason for VARD’s poor share price performance has been triggered by the sharp dip in oil prices. Brent crude oil prices have taken a 15% tumble to S$97.7/bbl from the YTD peak of S$115.1/bbl, driven by a stronger USD and easing geopolitical tensions. On a positive note, average AHTS spot rates in North Sea have rebounded strongly YoY in Aug due to the peak summer period. However, average PSV rates in the North Sea have deteriorated. Similarly, utilisation rates have increased for AHTS (YoY basis for Aug) but declined for PSVs, highlighting a possible oversupply situation for the latter.

Lower FV and reiterate HOLD

Given the uncertainties over the tax claims by the Brazilian authorities on VARD, volatility in the North Sea market and recent de-rating in the industry, we opt to lower our PER valuation peg from 10x to 9x. We also cut our FY14 and FY15 PATMI forecasts by 4.8% and 7.5%, respectively, to account for cost pressures in Brazil. Correspondingly, our fair value estimate dips from S$1.12 to S$0.94, still based on blended FY14/15F EPS. Maintain HOLD.

Source: OCBC Research - 23 Sep 2014