VARD's 3Q13 earnings of NOK76m (-67% y-o-y) were disappointing,  as was its 4.3% EBITDA margin vs our estimate of 7.6%. While its  results were better than  its  2Q13  net loss of  NOK20m,  margins  improved only slightly  as  its  Brazil  unit  continued  to  weigh  on  overall  profit.  We  cut our  FY13-15F  EPS  by  15-23%  and  downgrade  the  stock  to  NEUTRAL, with a lower SGD0.85 TP (from SGD1.10), based on a 10x FY14F P/E.

Margins  thin  as  Brazil  unit  remains  loss-making.  VARD  Holdings (VARD)'s  3Q13  net  profit  of  NOK76m  (-67%  y-o-y)  brought  its  9M13 earnings  to  NOK244m  (-69%  y-o-y),  below  our  and  consensus estimates,  owing  to weak margins.  Its  3Q13 EBITDA margin came in at 4.4%  vs  4.1%  in  2Q13.  There  was  little  sequential  improvement  in margins as the company's Brazil operation remained loss-making.

Drag  from  Brazil  likely  to  extend  into  FY14.  Vard  Niterói  is  still plagued  by  delays  and  cost  overruns  although  management  has implemented  organisational  changes  at  the  yard.  Delivery  of  its remaining four vessels  (Pro30,  Pro31,  Pro32,  Pro33)  are further delayed by  2-3  months  each,  with  the  last  vessel  expected  to  be  delivered  in 1Q15. We think VARD's Brazil woes may extend into FY14.

Bullish  on  new  orders.  VARD  saw  strong  orders  in  3Q13,  winning NOK7.95bn  worth  of  contracts.  Its  YTD  2013  new  orders  worth NOK11.9bn are close to our target of NOK12bn, while its  net orderbook stands at NOK19.6bn. Management is positive on securing more orders.

Lowering FY13-15F EPS by 15-23%. We downgrade FY13/14/15F EPS by 15/23/23% respectively  on lower EBITDA margins. We are projecting for FY13/14/15F EBITDA margins of 6.7/7.5/8.2%. While management is bullish on the outlook for orders, we believe that pricing will face growing competition from European and Asian yards.

Downgrade  to  NEUTRAL,  with  SGD0.85  TP.  We  see  little  near-term catalysts.  The new order wins may be positive but  the market is likely to keep  a  close  watch  on  VARD's  margins  over  the  next  few  quarters, which we believe will be lower than its historical long-cycle average of 8-10%. Our SGD0.85 TP is based on a 10x FY14F P/E.

Financial Exhibits

SWOT Analysis

Company Profile
VARD is a global shipbuilder of offshore support vessels (OSV) used in the offshore oil and gas industry.

Source: OSK