Towards Financial Freedom
VARD - 2Q13 Likely To Miss Consensus On Brazil Woes
VARD revealed that the operational challenges in Brazil will have a negative impact on its profitability, with 2Q13 earnings seen lower than consensus estimates. While the issues in Brazil are not new, we think the consensus forecast is too bullish, which is 16% higher than our FY13F net profit estimate. The stock could come under near-term pressure from a potential consensus earnings downgrade. Maintain BUY on VARD, pegged to a 12x FY13F P/E.
- Expecting low profitability in Brazil. In a statement by VARD on Friday, Management highlighted that: i) it expected 2Q13 results to be lower than consensus estimates due to further delays and costs overruns at the Niterói yard in Brazil, ii) the top priority in the near term isto stabilise the operations in Niterói and ramp up its new yard (VARD Promar), iii) operations outside Brazil remain stable, and iv) as a whole,VARD remains profitable.
- Consensus too bullish; 15%-30% downgrade likely. Consensus is projecting for FY13F net profit of NOK814m-NOK1.06bn vs our estimate of NOK765m. We believe consensus is behind the curve in lowering its numbers despite Management's guidance (post 1Q13 results) on theoperational challenges in Brazil. We think consensus could downgrade its numbers by as much as 30%.
- Brazil operations likely to be loss-making now. VARD is building five offshore support vessels (OSVs) in Brazil for DOF and Siem Offshore. One vessel had been delivered and the remaining four will be delivered in 3Q13 (1), 1Q14 (2) and 3Q14 (1). We see a 5%-10% downside to ourearnings forecast if the execution issues in Brazil are significantly worse than VARD's 1Q13 guidance.
- Maintain BUY with SGD1.69 TP. While the stock will likely face nearterm pressure from a potential consensus earnings downgrade, we think it has somewhat priced in the negative news from Brazil, as its YTD return has dropped 16% while its share price has fallen 11% below thetakeover price by Fincantieri. VARD is now trading at FY13-14F core P/Es of 7.6x and 7.3x respectively, with a 4.2% net dividend yield.
Source: OSK
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