In  line  with  its  profit  warning,  3Q14  PATMI  was  a  NOK37m  loss  as Brazil's  losses  widened  and  some  European  projects  suffered  cost overruns.  Maintain  SELL  with  a  SGD0.58  TP  (a  14.7%  downside).  We expect  a  breakeven  performance  from  Brazil  next  year  and  a  small recovery  back  to  FY13  levels.  We  believe  valuations  at  14x/11x FY14F/FY15F  P/Es  are  still  high  relative  to  peers  and  consensus forecasts are likely to fall c.40%.  

An  unexciting  quarter  and  likely  unexciting  years  ahead.  Vard's 3Q14 PATMI loss of NOK37m was somewhat smaller than feared,  even as  losses  in  Brazil  widened  to  c.NOK250m  from  c.NOK70m  in  2Q14. With the unprofitable projects soon to be  completed, Brazil should  see a slow  turnaround  to  break  even  over  FY15F,  which  should  reduce  the earnings  drag,  but  we  think  EBITDA  margins  are  likely to stay  at  suboptimal levels of 5-6% for the next two years. 

Order win outlook likely below replacement levels.  Management has guided  for  "below  average  new  order  intake  expected  in  the  near  to medium  term"  as  the  deepwater  segment  faces  uncertainties  over investment levels, asset utilisations and charter rates.  We believe Vard could  secure  one  or  two  more  orders  this  year,  but  a  slowing  order momentum  could  delay  a  return  to  healthy  profitability  that  would  be necessary for the stock to recover.  Given that the average order wins  in the last three years  were  NOK11.6bn, management could be guiding for order wins below replacement levels for the next two years. 

Consensus  downgrades  present  a  near-term  overhang.  At  >40% below consensus, we believe our forecasts have conservatively taken in most  expected  losses  and  zero-margin contracts  in  the  orderbook. We see  consensus  downgrades  of  c.40%  in  the  near  term  as  Vard's operations  are  unlikely  to  rebound  quickly,  which  should  limit  stock performance.

Valuations  look  high  relative  to  peers  with  strong  growth.  Vard's valuations  of  14x/11x  FY14/FY15F  P/Es  respectively  are  at  best  fair, though  we  think  the  premium  over  its  peers  with  strong  growth,  whichtrades  at  7x  FY14F  P/E,  is  undeserved.  Our  SGD0.58  TP  (from SGD0.57) is based on a 10x FY14F/FY15F blended P/E, with a premium already imputed for its higher technology and specialised skill-sets.

 

Source: OSK-DMG