• Still net loss
• Execution shifts towards cruise vessels etc
• Maintain HOLD

Net Loss of NOK 25m; Still Positive Op CF

VARD Holdings reported a 12% YoY fall in revenue to NOK 1.78b and a net loss of NOK 25m in 1Q17, compared to net profit of NOK 37m in 1Q16. Gross profit margin was 37.5% in 1Q17, compared to 34.6% in 1Q16. EBITDA margin (after restructuring cost), however, was lower at 1.9% vs. 2.3% in 1Q16 with higher other operating expenses in the quarter. This led to an operating loss in 1Q17, which has been the case since 2Q15.

A net loss of NOK 25m was registered in the quarter, compared to net profit of NOK 37m in 1Q16. Meanwhile, there was still healthy operating cashflow – inflow was NOK 243m in 1Q17 vs. NOK317m in 1Q16 and NOK767m in FY16.

Product Mix Moving to Cruise Vessels and Others; Offshore Risk Remains

In VARD’s operations, the majority of offshore projects in the order book are nearing completion, and there is a shift towards construction of cruise vessels and other specialized vessels in all stages of production. As the product mix changes, we will be monitoring the margins booked by the group.

Meanwhile, risk still remains in relation to the existing offshore project portfolio. There are also two PSVs (cancelled in 2015) and one DSV (cancelled in 2016) in the group’s inventory which are not part of the order book.

Maintain HOLD

As at end 1Q17, the order book amounted to NOK 12.98b, up from NOK 10.65b as at end 2016 and NOK 8.58b at the end of 1Q16. Looking ahead, there is still healthy demand from the exploration cruise vessel segment, while VARD’s position in the fisheries and aquaculture segment has been bolstered via its recent contracts for a krill fishing vessel, pelagic trawler and live fish transportation vessel.

With the group’s diversification into other industries, we believe the stock does not deserve a sector average of sub-0.5x book (for small-mid caps). Based on 0.8x book, our fair value estimate is S$0.23 and as such as our rating on the stock is HOLD.

Source: OCBC Research - 15 May 2017