CHALLENGING TIMES
Limited catalysts in the offing.
- Though the share price has corrected sharply over the last 12 months, we believe sentiment may continue to be affected by further losses in the Brazilian yards, as well as lack of order wins.
- Vard is a high-end OSV builder and customers may not be willing to invest in specialised vessels for deepwater applications unless oil price moves towards US$100/bbl again, which does not seem likely in the near to medium term.
YTD order wins in FY15 does not bode well.
- Vard recently secured a contract for a diving support vessel, which was its first order win in FY15.
- Management has previously indicated that fierce competition for a limited number of specialised vessels has resulted in a very challenging environment, and Vard could well end up falling short of our NOK5bn new order win assumption for FY15.
Lack of visibility on margin recovery trend.
- Adjusted EBITDA margins of 2.1% recorded in 1Q15 is far from normalised levels, as a result of challenging operations at the Brazilian yards.
- We reckon the pace and extent of margin recovery remains uncertain and improvements at the yards are not expected to result in a sharp rebound anytime soon.
Valuation:
- We maintain our FULLY VALUED recommendation with a target price of S$0.49, still pegged to 0.8x FY15 P/BV, which reflects the sub-par return (ROE) expectations of only 4-5% in FY15/16.
- The current orderbook of NOK15bn does underpin revenue visibility in FY15 but uncertainties linger due to a poor order win outlook, execution issues at the Brazilian yards and the weak Kroner.
Key Risks to Our View:
- Earnings rebound, order pick-up, corporate activity.
- The key risk to our FULLY VALUED call is if margin recovery and order win momentum is significantly earlier than we anticipate, which could help re-rate the stock.
- A sharp oil price recovery will also boost share price.
- Any corporate activity related to majority shareholder Fincantieri in terms of buying additional stake in the company at premium valuations could also be a upside catalyst.
(Suvro SARKAR)
Source: http://www.dbsvickers.com/
