VARD - 2Q13 Results Marred By Loss-Making Brazil Unit

• Brazil operation in the red. VARD saw a bigger 2Q13 net loss of NOK20m, a nearly ~NOK300m swing from a net profit of NOK279m in 2Q12. The much lower 1H13 NOK168m net profit (-69% y-o-y) comprised only 22%-23% of our and consensus estimates respectively.The letdown was primarily due to losses from VARD Niterói, higher outsourcing costs and higher start-up expenses at VARD Promar. Meanwhile, 2Q13's EBITDA margin stood at 4.1% while VARD also took a NOK70m goodwill writedown on Niterói. Assuming stable profits at its Norway/Romania yards, total losses in Brazil for 2Q13 may range from NOK180 to NOK200m. Based on its minority interest, VARD's share of loss from Promar was NOK24m in 2Q13 and NOK8m in 1Q13.
• Little guidance on margins and further provisions. Management's  tone was cautious during the briefing. The key takeaways are: i) no  margin guidance ii) the absence of a guarantee that this would be the end of the losses in Brazil iii) Management highlighted that all provisions made are based on best estimates as of today iv) order outlook remains strong v) YTD orders have hit NOK3.9bn - at 33% of our forecast - while the outlook for more orders in 2H13 is positive.
• FY13-14F EPS estimates cut by 40% and 22%. We now estimate zero  margin for the remaining four OSVs and first four LNG tankers to be built in Brazil. We expect blended EBITDA margins of 7.5%/9.1% for FY13F/14F as we think the Brazil operation will continue to weigh down on margins in the medium term.
• TP cut from SGD1.69 to SGD1.10 on 10x FY14F P/E. We roll forward  our valuation from FY13 to FY14 and lower our target P/E from 12x to 10x to reflect the mounting operating challenges in Brazil.