Yesterday, Vard tumbled as much as 23% intra-day, hitting a low of $0.63 before paring some losses to finish down 14.6% for the day at $0.70. Nevertheless, this is a record low closing price for Vard, with the plunge sparked by the company’s profit warning for its third quarter 2014 (3Q14) results. Macquarie Equities Research (MER) makes sense of this profit warning in a research piece released yesterday morning before the market opened.

Negative EBITDA warning for 3Q14 results: Vard which is due to announce 3Q14 results on 11 November before market opens has said that it expects a marginally negative earnings before interest, tax, depreciation and amortisation (EBITDA) result.

Cost overruns in the new shipyard in Brazil: Additional costs were incurred in the two new vessels in Vard’s new Promar shipyard. These vessels are currently outsourced to a third-party shipyard and being outfitted at the old shipyard in Niteroi. Vard has also incurred higher-than-expected ramp-up costs in the new shipyard.

3Q14 result could show a loss of around NOK100m: MER was expecting Vard to report EBITDA of NOK180m in 3Q14 and profit of NOK100m. MER thinks cost overruns could amount to around NOK200m, thus leading to a loss in the quarter.

Silver lining – Brazil tax claims not to be provided for: After discussing with their auditors, Vard has decided not to provide for the NOK200m of tax claims. MER thinks this is because the auditors have reasoned that there could be a greater than 50% chance of Vard’s not having to pay.

MER’s full-year profit estimate of NOK506m could take a hit by NOK200m: The cost overruns could shave 40% off MER’s 2014 full-year profit estimate.

MER’s action and recommendation

More overhang on the stock; 3Q14 commentary would be key: MER thinks it would worry investors that after the old shipyard’s issues were resolved, Vard has now issues in the new shipyard, in which it is building as many as 10 vessels worth NOK6.2bn, which is around 25% of its total order book.

Stock is cheap on 2015 P/E but earnings under risk now: The cost overruns in the new Brazil shipyard now pose a serious threat to Vard’s overall profitability. MER will revisit their estimates after management commentary in 3Q14 results. In the meantime, MER has an Outperform rating on the stock with a 12-month target price of $1.19.

Source: Macquarie Research - 16 Oct 2014