• Now trading at 0.4x P/NTA
• Negative news likely priced in
• Upgrade to HOLD

Share price has lost lots of ground vs. related indices

Ever since our sell report in May last year, the stock price of VARD Holdings has lost about 65% of its value, compared to the 37% drop by the FTSE Oil and Gas Index, as well as the 25% fall by the FTSE Maritime Index. 2015 was the group’s first year of loss after the 2008 financial crisis, which is not surprising given that VARD is facing the dual challenge of 1) a severe cyclical downturn in its core OSV market, and 2) having to manage its troubled Brazil operations.

Also building large fishing trawlers and cruise ships

At the end of FY15, VARD’s order book amounted to NOK 10.23b, down from NOK 14.01b at end 3Q15 and NOK 17.74b at the end of FY14. For 2016, the group has guided revenue of between NOK 8-9b, with a positive EBITDA margin. Given that the oversupply situation in the OSV market is compounded by a large order book that has yet to be delivered from yards around the world, VARD has increased its focus on obtaining orders from other sectors like fisheries and aquaculture.

Indeed, it recently signed a letter of intent for the construction of four luxury expedition cruise vessels for French cruise company PONANT. Recall that VARD’s parent, Fincantieri, builds a wide range of commercial and military vessels and is a well-known builder of cruise ships. Meanwhile, cost reduction and efficiency improvement programs are being intensified to enhance the group’s competitiveness in core and new markets. As for Brazil, operations will be maintained in VARD Promar, while newbuilding activities at Vard Niteroi will be phased out eventually.

Negatives largely priced in; upgrade to HOLD

The market is still concerned about potential impairments that may occur, as well as potential vessel deferments and cancellations. Taking into account the low valuations that stocks in the sector are trading at, we lower our valuation from 0.6x to 0.4x P/NTA, such that our fair value estimate drops from S$0.33 to S$0.20. However, given the significant price declines that the stock has suffered thus far, we believe the negatives have largely been priced in. As such, we upgrade our rating on the stock from sell to HOLD.

Source: OCBC Research - 2 Apr 2016