• Securing non- oil and gas orders
• Ongoing client restructurings
• Outlook remains dim

North Sea market remains tough

VARD Holdings has been hit hard by the downturn in oil prices, considering that a key market, the North Sea, was one of the most impacted geographical segments in the offshore support vessel sector. The downturn shows few signs of easing there; some owners and operators are looking at employing their vessels for work outside the traditional supply vessel sector, some are merging and others are going through major debt restructuring.

Has been securing non-oil and gas orders

VARD has therefore been diversifying away from the oil and gas sector, and has successfully secured vessels relating to aquaculture, module carrier vessels (20 vessels since May; ~US$20m per vessel) and luxury expedition cruise vessels – the latter likely with the help of its parent company, Fincantieri, which is a large shipbuilding company with a long track record in naval, cruise ships and large ferries, amongst others. Other top players in the expedition cruise ship market are German-based Meyer Werft and STX France.

The expedition cruise ship market is doing relatively well, and Fincantieri is seeing good utilisation of its yards. Hence it also booked some yard space in VARD’s Romanian yards so that some cruise ship work can be undertaken. In August, VARD secured orders for four luxury expedition cruise vessels for PONANT, and another two for Hapag-Lloyd Cruises.

Monitoring counterparty risk

As at end 2Q16, the group’s orderbook amounted to NOK 11.93b, supported by new order intake of NOK 6.22b in the quarter. However, client restructurings continue to put stress on the offshore order book, and there could be further order deferments or even terminations. If a shipbuilding contract were to be terminated, the bank providing the construction loan has the right to accelerate the loan maturity date, unless VARD is able to provide acceptable security. Along with lower valuations in the sector, we tweak our valuation from 0.45x NTA to 0.4x, and roll forward to FY17F book such that our fair value estimate drops from S$0.20 to S$0.166. Maintain HOLD.  

Source: OCBC Research - 26 Sept 2016