Vard Holdings Ltd - Buy ahead of earnings recovery

Written By Stock Fanatic on Thursday, November 7, 2013

While Vard?s 3Q earnings miss of 5% was hardly inspirational, it cannot be argued that the company is in a downward spiral either. We expect a 2-year EPS CAGR of 15% in FY13-15 due to margins recovery. Catalysts could come from stronger earnings and orders.

At 60% of our FY13 EPS, 9M13 was 5% below our and broadly in line with consensus. We cut our FY13 EPS to factor in the miss and adjust our FY14/15 EPS by +7%/-19% as we cut our orders outlook and adjust our order recognition schedule. We upgrade to Outperform from Neutral as we think that earnings have bottomed out. Our target price rises as we roll forward to 9x CY15 P/E (10% above its mean since IPO).

3Q earnings bottomed out

Owing to the lower-than-expected turnover and the corresponding operating leverage effects, Vard recorded NOK66m core earnings (-71% yoy) for 3Q. We note that the low turnover was somewhat due to seasonality and expect a stronger 4Q. While continued delays and cost overruns for the Niteroi yard are hardly inspirational, it cannot be argued that the company is in a downward spiral either. In fact, EBITDA margins improved slightly by 0.2% pts qoq to 4.3% while the group achieved gross margins of 31.4% vs. our forecast of 26.2%.

Record orders in 3Q

Thanks to the record-NOK6.5bn pipe lay support vessel order, Vard secured NOK8bn orders in 3Q, bringing the YTD orders to NOK11.9bn. The current order book stands at NOK19.5bn, or 1.6x book-to-bill.

Outperform premised on conservative grounds

Our 9x CY15 P/E-derived target price factors in a recovery of EBITDA margins to 8.3% for FY15, 8% for FY14 and 6.7% for FY13 (within the company?s historical average). 

Intra Day
	Gadgets powered by Google

Technical Analysis

Daily Chart

We expect margins to improve due to  :

1) zero-margin projects in Niteroi being flushed out, 

2) higher utilisation at the Promar yard, 

3) scaling of the learning curve for Transpetro orders and 

4) investment initiatives in its Romanian and Vietnamese yards paying off. (Read Report)

 

CIMB TP : 0.98 Outperform

Buy ahead of earnings recovery

While Vard?s 3Q earningsmiss of 5% was hardly inspirational, it cannot be argued that the company is in a downward spiral either. We expect a 2-year EPS CAGR of 15% in FY13-15due to margins recovery. Catalysts could come from stronger earnings and orders.

At 60% of our FY13 EPS, 9M13 was 5% below our and broadly in line with consensus. We cut our FY13 EPS to factor in the miss and adjust our FY14/15 EPS by +7%/-19% as we cut our orders outlook and adjust our order recognition schedule. We upgrade to Outperform from Neutral as we think that earnings have bottomed out. Our target price rises as we roll forward to 9x CY15 P/E (10% above its mean since IPO).

3Q earnings bottomed out

Owing to the lower-than-expected turnover and the corresponding operating leverage effects, Vard recorded NOK66m core earnings (-71% yoy) for 3Q. We note that the low turnover was somewhat due to seasonality and expect a stronger 4Q. While continued delays and cost overruns for the Niteroi yard are hardly inspirational, it cannot be argued that the company is in a downward spiral either. In fact, EBITDA margins improved slightly by 0.2% pts qoq to 4.3% while the group achieved gross margins of 31.4% vs. our forecast of 26.2%.

Record orders in 3Q

Thanks to the record-NOK6.5bn pipe lay support vessel order, Vard secured NOK8bn orders in 3Q, bringing the YTD orders to NOK11.9bn. The current order book stands at NOK19.5bn, or 1.6x book-to-bill.

Outperform premised on conservative grounds

Our 9x CY15 P/E-derived target price factors in a recovery of EBITDA margins to 8.3% for FY15, 8% for FY14 and 6.7% for FY13 (within the company?s historical average). We expect margins to improve due to 1) zero-margin projects in Niteroi being flushed out, 2) higher utilisation at the Promar yard, 3) scaling of the learning curve for Transpetro orders and 4) investment initiatives in its Romanian and Vietnamese yards paying off.

Orderoutlook: tampering expectations

For orders, we are now expecting NOK12.6bn for FY13 (previously NOK14bn), NOK10bn for FY14 (previously NOK11bn) and NOK12bn (no change) for FY15.



https://brokingrfs.cimb.com/AtGDjr4Gcl8GZ1hHKuVEDGgcy5LQmeow-xeGsJvMG5SmoxA7sw6u8glwPQ_AbgpckkDnbCNRxfw1.pdf

 

 

We feel that we are more conservative than management ? the group continues to be positive on order intake for the remainder of FY13 and FY14, based on its level of discussions with the customers. Even so, our tampered expectations still project a 2-year EPS CAGR of 15% in FY13-15. Figure 1: For orders, we are now expecting NOK12.6bn