Vard has lost approximately 36% since the beginning of September, making it one of the worst performing stock in the shipbuilding industry.
 
VARD reported a 3Q14 loss of NOK37mn after issuing a profit warning 3 weeks ago. Macquarie Equities Research (MER) issued a report on 11 November on VARD, downgrading VARD to Neutral as they cut earnings estimates by 40-45% each for the next 2 years and their target price to S$0.67. Here are some excerpts from the report.
 
MER thinks investor confidence has been severely damaged by management’s continuous misguidance and profit warnings and it will take at least 2-3 good quarters for this confidence to be restored.
 
Impact
Negative 1: Brazil is out of control; huge uncertainties remain: Old yard Niteroi has 2 more vessels to be delivered while outfitting work on 2 LPG carriers for Promar is also being done. Cost overruns were incurred for both. In addition, new yard Promar has launched the building of its 1st vessel. Slow productivity forced project revisions again. Management team changed again.
 
Negative 2: Not only Brazil, even European yards into cost overruns:
This is a big negative, in MER’s view. VARD experienced substantial cost overruns in a few projects in Romania and Norway. 70% of VARD’s current order book is in Europe and this poses big risk to future margins, in MER’s view.
 
Negative 3: Order inflows have fallen sharply and outlook is murky: After a great start to the year in which VARD won NOK8.2bn of new orders in 1H14, it has only won NOK0.7bn of orders since July. VARD guided for a soft market in the near to medium term. MER has cut their order inflow estimates
from NOK13bn to NOK11bn for 2014 and NOK 11.5bn/year in 2015/16.
 
Negative 4: Order book is healthy at NOK20bn but large chunk is at risk:
25% of this order book is in Brazil with the construction of the 1st of the 10 vessels in the new yard having just started and gotten into cost overruns.
 
Negative 5: Guidance for margin improvement but how much? VARD has guided for positive EBITDA margins in 4Q14 and 2015. MER has built 4.7% for 4Q14 and 6.3% for 2015 but these have downside risk, in their view.
 
Negative 6: Weakening NOK versus USD: A large chunk of VARD’s yard construction loans are in USD, which is resulting in forex loss. NOK has fallen 10% vs the USD in the last 3 months, impacting group profits negatively.
 
Price catalyst

• 12-month price target: S$0.67 based on a DCF methodology.
• Catalyst: 4Q14 results

 
Action and recommendation
At 10x 2015E earnings, with risk to earnings, stock is fairly priced now:
Despite the sharp fall, MER thinks it will take at least 2-3 good quarters for investors to have any confidence in management guidance. In addition, MER doesn’t see VARD paying out high dividends due to low profits near term.

Source: Macquarie Research - 24 Nov 2014